Looking To Start a Fund, In Search of Advice
To start, I am a college senior. I have been very interested in the stock market since middle school. I began investing in high school (a few bucks and shares), and seriously investing (a few thousand, a lot of money for someone my age) in spring of my freshman year of college. I am now a senior. In the three years which I have been investing (by this I mean - checking throughout the day, researching hundreds of securities, etc), my personal fund is up just over 200% in the 3 year period, and the yearly rate of return is upward trending. Compared to literally everyone else I know who has been doing investing during this time period, my number is enormous, and I am by far the most interested in the topic. Furthermore, the 200% is quite small in comparison to what it could be. I got out of several stocks (which eventually posted increases in the 1000s percentile compared to when I purchased them), thinking a 70-80% return was excellent. Though I obviously have a tremendous amount still to learn, and know far less than I do not know, I have learned from the mistakes I have made, hence the upward trend in yearly return rate. I am very good with some parts of math, others not so much. I have a limited but basic knowledge of the financial industry, how it works, the skills needed to succeed, etc. I am just very interested in the idea of the stock market, have been for a while, and for my age I believe, have become fairly good at using to make money.
Anyway, it is no coincidence that friends often times come to me for investment advice, wondering what stocks I am liking at the moment, things like that. I love discussing them, and do it willingly for free because they are friends just trying to make some money ontop of what they have already earned. Beyond that, I think my dream job would be running a hedge fund, and recently have had above average amount of people approaching me for advice. The obvious next thought is "Why don't I stop telling them what to do with their money, and rather just have them give it to me to manage for them". So, we have had some of these discussions, and several people are on board giving me some money to invest for them.
The thing is, I am a big believer in knowing what you don't know. I am betting there are laws I am unaware of which would prevent me from taking their cash and investing it on my personal account, hence why I havent done it. So, I am wondering what I can do. Clearly this is very small, but I think the sooner the better to start, hence why I am looking into it. Obviously this is not a 'hedge fund', more just managing a small sum of a money from a few people I know. However, the idea is to have it do it will, get referrals, and have it grow in size, and perhaps one day the road, turn it into a hedge fund, which I created and run. I understand that process is a 1000 step one, and I am just looking for advice on step 1. I am not somebody who hears the word 'hedge fund manager' and thinks of gulf streamers and yachts. Rather, I have always been interested in the stock market, and making money off it. I think I want to do that full time, but not as a day trader (too short), so hedge fund and mutual fund manager seems like the way to go, but the strategies I have employed of buying long and shorts together to protect against losses, seems to clearly fit the bill of a hedge fund strategy. Hence, here I am.
In short - Say I have a dozen people, made of soon-to-be college graduates, older family members, etc...who would be giving me, say, a ball park figure in the $12,000-$15,000 range, + $5,000 if my own money, for $17-20,000 total, to invest for them. Clearly not a very large number. Is there a LEGAL way to start an individual fund, which I would control, using their money, for them?
No there is not. A) Any
No there is not.
A) Any investment vehicle (mutual fund, hedge fund, CTA, etc) must either register under the '40 act or have exclusively accredited investors as well as meet other qualifications for exemption.
B) Even if your investors were all accredited there is still costs and work necessary to start an actual commingled fund related to creating various legal entities, writing operating agreements, etc to the point where a fund with so little money is likely not worth the effort.
C) You could be granted trading authority on their accounts on a one-by-one basis or create a joint account (usually a broker won't allow more than 2 or 3 people in a joint account) but you still can't charge fees. Some brokerages will also not give trading authorization unless you're an RIA or spouse.
D) If you receive compensation from any non-accredited person for providing investment advice you need to register as an RIA which will require paperwork, compliance costs, and book keeping.
There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.
form an llc or trust. see
form an llc or trust. see below.
http://www.fwallstreet.com/article/170-how-to-star...
--
sm
Kenny_Powers_CFA wrote: No
No there is not.
A) Any investment vehicle (mutual fund, hedge fund, CTA, etc) must either register under the '40 act or have exclusively accredited investors as well as meet other qualifications for exemption.
B) Even if your investors were all accredited there is still costs and work necessary to start an actual commingled fund related to creating various legal entities, writing operating agreements, etc to the point where a fund with so little money is likely not worth the effort.
C) You could be granted trading authority on their accounts on a one-by-one basis or create a joint account (usually a broker won't allow more than 2 or 3 people in a joint account) but you still can't charge fees. Some brokerages will also not give trading authorization unless you're an RIA or spouse.
D) If you receive compensation from any non-accredited person for providing investment advice you need to register as an RIA which will require paperwork, compliance costs, and book keeping.
Say I was not going to charge any sort of fee or commission for the first year or two, just pure managing, until the fund was of a larger scale? Payment would come through referrals.
The basic idea i have right now, ideally, would be to create a fund where, for the first year
1)no fee or commission
and potentially, again, if legal/easy/cheap to finalize-
2) subsidized losses: I would cover say 50% of all losses (the investments are so small, i should be able to handle it)
The only 'payment' would come through referrals at the end of the first year, at which point I would ideally have significantly greater capital to work with.
If no to the above, what figure should I be looking to meet in commitments before founding and starting? Would 100k be enough?
So every retard with 5k and
So every retard with 5k and an e-trade account wants to start his own fund nowadays?
Under my tutelage, you will grow from boys to men. From men into gladiators. And from gladiators into SWANSONS.
20k dude? Just put it in your
20k dude? Just put it in your etrade account and trade.
If I had asked people what they wanted, they would have said faster horses - Henry Ford
Yes you could do it and you
Yes you could do it and you could do it easily. Following this link will keep you well within any legal guidelines and will take care off all the back office things. You will also be able to legally charge for your services. I believe its a flat fee and illegal (at this stage) to charge performance fees.
http://individuals.interactivebrokers.com/en/p.php...
ps. don't worry about people calling you retarded or belittling your goals. It will be hard and you may lose some friends but you should do what you want.
Yes you could do it and you
Yes you could do it and you could do it easily. Following this link will keep you well within any legal guidelines and will take care off all the back office things. You will also be able to legally charge for your services. I believe its a flat fee and illegal (at this stage) to charge performance fees.
http://individuals.interactivebrokers.com/en/p.php...
ps. don't worry about people calling you retarded or belittling your goals. It will be hard and you may lose some friends but you should do what you want.
pcr89 wrote: Say I was not
Say I was not going to charge any sort of fee or commission for the first year or two, just pure managing, until the fund was of a larger scale? Payment would come through referrals.
The basic idea i have right now, ideally, would be to create a fund where, for the first year
1)no fee or commission
and potentially, again, if legal/easy/cheap to finalize-
2) subsidized losses: I would cover say 50% of all losses (the investments are so small, i should be able to handle it)
The only 'payment' would come through referrals at the end of the first year, at which point I would ideally have significantly greater capital to work with.
If no to the above, what figure should I be looking to meet in commitments before founding and starting? Would 100k be enough?
A) It's pretty apparent that you have zero understanding of the laws and regulations involved (for example guaranteeing client losses is a no-no). Go read up on the material required to pass the series 63/65 and do some googling.
B) Be careful and do your own due diligence before you start setting up legal entities or charging for advice provided to a joint account like the one at Interactive Brokers. For example, the link to the process for "starting a hedge fund" drastically underestimates the start-up costs and even their estimate is far too much as a % of your proposed capital.
C) $100k would be better but then you run into rules about total #'s of investors. Also it's unfair/possibly illegal (not sure) to spend investor capital on start-up costs, so think the business plan through.
There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.
Two ways to start your own
Two ways to start your own fund:
1) Get backed by some heavy hitters. I know people who have done this between the ages of 22 - 25, so it can be done, but it's rare. You generally have to be really good and then either have connections or get lucky enough that someone will meet you.
2) Run the institutional gauntlet and hope that you are able to rise above the masses of would be fund managers and get a break. Most aspirants never get anywhere close regardless of their track record -- you need infrastructure, a respected prime broker, auditors, and a legal team. Generally to go this route you need to be well established in the business with pedigree. As hard as the first option is, it is easier than this.
In case you don't know what I'm talking about:
http://en.wikipedia.org/wiki/Gauntlet_(punishment)
Yeah, it's pretty brutal like that. The success rate is very low even for people with good track records.
You may have the soul of an
You may have the soul of an investor, but you are not ready yet. Not to burst your bubble, but $20,000 is a tiny, tiny amount. A fund of $20 million is tiny. Basically, you and your friends should write your own management agreements, because hiring a real lawyer will eat into your returns.
You may be talking about some novel fund model, but that is not a hedge fund. Hedge funds typically charge a management fee (to cover operating expenses) and a performance fee. I've never heard of this "payment by referral" fee you mention. Some of the proposals you have are just bizarre. If a fund manager offered to cover some of my losses, I wouldn't invest with him- that's nuts. That is a warning sign- kind of like Mr. Madoff guaranteed 14% return per year.
Look, $100,000 isn't enough. It costs $60,000 to $100,000 to set-up a fund legal structure done by a respectable lawyer and incorporated in the Grand Cayman (it is amortized over 60 months). That doesn't include service providers (fund administrators, accountants, retainer for litigation, brokerage accounts, an office etc.) Assuming typical fees of 2% management fee and 20% performance fee (which is ridiculous because you are a 21 or 22-year old straight out of college without an accredited track record), if, in the first year, you earned a 100% return ($100,000), you would take a cut of $22,000 BEFORE taxes. Of course, none of this would matter because, unless your college buddies have trust funds and qualify as accredited investors- they can't invest. Meaning, you are going to have to market your fund to HNWIs (high net worth individuals). That will likely be a herculean undertaking if you are talking about shopping around a vanilla hedge fund without a unique focus or edge.
Enough criticism- you want suggestions and help, right? Look into managed accounts. They are, for all intents and purposes, half-assed hedge funds. I have known a few people who started out managing accounts before they became full-fledged hedge fund managers (including the one I work for); much cheaper to setup and you can build a track record, but you get what you pay for. Managed accounts can be extremely problematic. The arrangements don't give you power of attorney over the funds, so getting paid for performance can be...trying or sometimes impossible (you may have to sue them which costs thousands of dollars, they fight and delay- it's a mess). Continue to invest on your own- maybe, get a job at a hedge fund or asset management firm. But you need more time, experience, and considerably more money.
Bene qui latuit, bene vixit- Ovid
rls wrote: You may have the
You may have the soul of an investor, but you are not ready yet. Not to burst your bubble, but $20,000 is a tiny, tiny amount. A fund of $20 million is tiny. Basically, you and your friends should write your own management agreements, because hiring a real lawyer will eat into your returns.
I mention it in the opening post- I am not talking about opening my own hedge fund tomorrow. I'm aware 20k is salt on the peanuts. Writing our own management agreements is a constructive idea, but again, I am not educated in the legality of that area.
You may be talking about some novel fund model, but that is not a hedge fund. Hedge funds typically charge a management fee (to cover operating expenses) and a performance fee. I've never heard of this "payment by referral" fee you mention. Some of the proposals you have are just bizarre. If a fund manager offered to cover some of my losses, I wouldn't invest with him- that's nuts. That is a warning sign- kind of like Mr. Madoff guaranteed 14% return per year.
I am aware it is not a hedge fund. Payment by referral = I won't keep a dime of my friends profits, rather I will say 'find me 3 new clients who will want to invest in me' or whatever. As for the covering losses, again, we're talking about friends. The biggest hurdle is getting their money, because I believe I will do well once I have it. If telling my friends Ill repay $100 should they lose it will get me over the hurdle, I don't see a problem, in theory. Whether it is legal is a different question, and I won't be doing a thing until I have the legal ?s answered.
Look, $100,000 isn't enough. It costs $60,000 to $100,000 to set-up a fund legal structure done by a respectable lawyer and incorporated in the Grand Cayman (it is amortized over 60 months). That doesn't include service providers (fund administrators, accountants, retainer for litigation, brokerage accounts, an office etc.) Assuming typical fees of 2% management fee and 20% performance fee (which is ridiculous because you are a 21 or 22-year old straight out of college without an accredited track record), if, in the first year, you earned a 100% return ($100,000), you would take a cut of $22,000 BEFORE taxes. Of course, none of this would matter because, unless your college buddies have trust funds and qualify as accredited investors- they can't invest. Meaning, you are going to have to market your fund to HNWIs (high net worth individuals). That will likely be a herculean undertaking if you are talking about shopping around a vanilla hedge fund without a unique focus or edge.
Ok, this is how I see it. There are many ways to break into the hedge fund business, and one day run your own. The primary way is to work for one after graduation, build your own net work, move up the ladder, net work, etc. I graduate in May, and have a job entering a training program to eventually become a CFP or CFA (whichever I eventually choose) in a few years. I will not be working in a hedge fund, at least early on in my career. What I would like to do, however, it start up a smaller investment fund right now, that with time, grows in $$$ and in cliental, and eventually turn that find into an official hedge fund, when the size and time are right. Clearly that is not right now, I am just wondering if there is a way to pool the money of several friends and myself for me to manage; it would be easier for the time being.
Enough criticism- you want suggestions and help, right? Look into managed accounts. They are, for all intents and purposes, half-assed hedge funds. I have known a few people who started out managing accounts before they became full-fledged hedge fund managers (including the one I work for); much cheaper to setup and you can build a track record, but you get what you pay for. Managed accounts can be extremely problematic. The arrangements don't give you power of attorney over the funds, so getting paid for performance can be...trying or sometimes impossible (you may have to sue them which costs thousands of dollars, they fight and delay- it's a mess). Continue to invest on your own- maybe, get a job at a hedge fund or asset management firm. But you need more time, experience, and considerably more money.
Managed accounts was another idea. Many of my friends have their own 'portfolio's', and have just given me their ETRADE passwords, though I havent actually made a trade for them. Again, my ? is regarding whether or not I could just take these dozen or so accounts and pool them into one.
Interactive broker's "friends
Interactive broker's "friends and family" account would probably be the easiest for you. This account let's you set up a "master account" and "sub accounts" where trades made in the master are then mirrored across all the sub portfolios. IB is the only brokerage i've seen that offers this, but I haven't tried it myself though
pcr89 wrote: rls wrote: You
You may have the soul of an investor, but you are not ready yet. Not to burst your bubble, but $20,000 is a tiny, tiny amount. A fund of $20 million is tiny. Basically, you and your friends should write your own management agreements, because hiring a real lawyer will eat into your returns.
I mention it in the opening post- I am not talking about opening my own hedge fund tomorrow. I'm aware 20k is salt on the peanuts. Writing our own management agreements is a constructive idea, but again, I am not educated in the legality of that area.
You may be talking about some novel fund model, but that is not a hedge fund. Hedge funds typically charge a management fee (to cover operating expenses) and a performance fee. I've never heard of this "payment by referral" fee you mention. Some of the proposals you have are just bizarre. If a fund manager offered to cover some of my losses, I wouldn't invest with him- that's nuts. That is a warning sign- kind of like Mr. Madoff guaranteed 14% return per year.
I am aware it is not a hedge fund. Payment by referral = I won't keep a dime of my friends profits, rather I will say 'find me 3 new clients who will want to invest in me' or whatever. As for the covering losses, again, we're talking about friends. The biggest hurdle is getting their money, because I believe I will do well once I have it. If telling my friends Ill repay $100 should they lose it will get me over the hurdle, I don't see a problem, in theory. Whether it is legal is a different question, and I won't be doing a thing until I have the legal ?s answered.
Look, $100,000 isn't enough. It costs $60,000 to $100,000 to set-up a fund legal structure done by a respectable lawyer and incorporated in the Grand Cayman (it is amortized over 60 months). That doesn't include service providers (fund administrators, accountants, retainer for litigation, brokerage accounts, an office etc.) Assuming typical fees of 2% management fee and 20% performance fee (which is ridiculous because you are a 21 or 22-year old straight out of college without an accredited track record), if, in the first year, you earned a 100% return ($100,000), you would take a cut of $22,000 BEFORE taxes. Of course, none of this would matter because, unless your college buddies have trust funds and qualify as accredited investors- they can't invest. Meaning, you are going to have to market your fund to HNWIs (high net worth individuals). That will likely be a herculean undertaking if you are talking about shopping around a vanilla hedge fund without a unique focus or edge.
Ok, this is how I see it. There are many ways to break into the hedge fund business, and one day run your own. The primary way is to work for one after graduation, build your own net work, move up the ladder, net work, etc. I graduate in May, and have a job entering a training program to eventually become a CFP or CFA (whichever I eventually choose) in a few years. I will not be working in a hedge fund, at least early on in my career. What I would like to do, however, it start up a smaller investment fund right now, that with time, grows in $$$ and in cliental, and eventually turn that find into an official hedge fund, when the size and time are right. Clearly that is not right now, I am just wondering if there is a way to pool the money of several friends and myself for me to manage; it would be easier for the time being.
Enough criticism- you want suggestions and help, right? Look into managed accounts. They are, for all intents and purposes, half-assed hedge funds. I have known a few people who started out managing accounts before they became full-fledged hedge fund managers (including the one I work for); much cheaper to setup and you can build a track record, but you get what you pay for. Managed accounts can be extremely problematic. The arrangements don't give you power of attorney over the funds, so getting paid for performance can be...trying or sometimes impossible (you may have to sue them which costs thousands of dollars, they fight and delay- it's a mess). Continue to invest on your own- maybe, get a job at a hedge fund or asset management firm. But you need more time, experience, and considerably more money.
Managed accounts was another idea. Many of my friends have their own 'portfolio's', and have just given me their ETRADE passwords, though I havent actually made a trade for them. Again, my ? is regarding whether or not I could just take these dozen or so accounts and pool them into one.
I'm not trying to be a dick but hopefully some honesty will help you out.
-You're up 200% in the last 3 years? That is pretty good, but consider that the S&P bottomed out at 666 in March 2009. Three years later, the S&P is at 1400. You significantly beat the market, but it could have been done with a lot of high beta stocks, rather than brilliant research and portfolio management. If you had a lot of financials, energy, miners, etc you would be up a ridiculous amount on the market. The "hedge" part of "hedge fund" comes from making money regardless of the market environment. How would your current positions do if the giant, coordinated global Central Bank effort fell apart? A terrorist attack or war in Iran? A US default on July 31 (more probable than any of us would like to admit)? Massive financial regulation that crippled the US mega-banks? Its great you made some money in college. Use it to move to New York when you get a job at a fund. Successfully running a PA is a legitimate help for interviews. I'm not trying to knock you here, but this is the equivalent of a kid who built an Estes rocket saying he is going to fly to the moon in a year.
I know a few people who have been seeded at a relatively young age (20s to early 30s). They all had several years of experience at different funds, operational support, at least $10mm in capital, and obsessed over the markets.
Read non-stop, try to find a job where you can learn as much as possible, develop more of a capital base (and friends with a lot more coin), and stay focused on the end goal.