Starting a Small "Hedge Fund"
A number of friends/acquaintances want to give me money to manage on their behalf. Obviously if I were to do this under a personal account it would be illegal. So how hard/costly is starting an investment fund that can take money from other people? I would just want the cheapest, simplest legal structure possible and all funds would be from people I personally knew. I say "hedge fund" because I imagine that the legal structure they follow is most conducive to what I want to do but I am not married to any particular fund type/structure. For what it's worth, my investing style is macro-based, and I would want need access to FX and US equities/ETF markets. I know this kind of thing might not be practical at this point but I was just wondering if it was.





To do it properly, it's
To do it properly, it's expensive ($30+K). To do it half-assed, it's really cheap ($3K).
You would set up an LP and an LLC to serve as the GP. Then open a brokerage account, accept investments, and trade them. You could just set up one LLC and do everything under that, but that's viewed as shady, there's a reason everyone does an LP...
The quality of your legal/accounting is what defines how much this costs. Also, unless you're going to have at least a few hundred K in AUM, don't bother as you won't have enough size to build a worthwhile track record.
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alexpasch wrote: To do it
To do it properly, it's expensive ($30+K). To do it half-assed, it's really cheap ($3K).
You would set up an LP and an LLC to serve as the GP. Then open a brokerage account, accept investments, and trade them. You could just set up one LLC and do everything under that, but that's viewed as shady, there's a reason everyone does an LP...
The quality of your legal/accounting is what defines how much this costs. Also, unless you're going to have at least a few hundred K in AUM, don't bother as you won't have enough size to build a worthwhile track record.
+1 My dad did it in the 90s he said it cost him about 30k. Just out of curiosity how much money would your fund have?
What if your family/ friends
What if your family/ friends gave you money as a "gift", and the returns you withdraw from the personal account is your way of thanking them?
I win here, I win there...
Bi-Winning wrote: What if
What if your family/ friends gave you money as a "gift", and the returns you withdraw from the personal account is your way of thanking them?
So wishy washy....
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I fail to see how anybody
I fail to see how anybody would find out if you traded $2000 on behalf of your relative?
Just curious.
I win here, I win there...
alexpasch wrote: You would
You would set up an LP and an LLC to serve as the GP. Then open a brokerage account, accept investments, and trade them. You could just set up one LLC and do everything under that, but that's viewed as shady, there's a reason everyone does an LP...
Why LP and LLC required?
Bi-Winning wrote: What if
What if your family/ friends gave you money as a "gift", and the returns you withdraw from the personal account is your way of thanking them?
It just doesn't work for a number of reasons. It's impractical because you would foot the tax bill on the realized gains in the personal account. Plus, your investors would also pay taxes on their gains. Technically you could "gift" the distributions back to your investors, if the $ amount was small, but in the end managing pooled assets in a PA would just be incredibly inefficient.
Newbie, Alot of it is tax
Newbie,
Alot of it is tax code related for the most part. Without diving into great detail, by using an LLC and an LP, the managing partners of a hedge fund's management company (the LLC) have no "individual" onus in terms of tax liability, particularly in the event of the fund's failure pursuant to non-illegal dealings. Basically, if the hedge fund goes belly up, provided it did nothing illegal, the managing partners are not deemed liable to pay for the failure out of pocket.
Additionally, there are benefits to using this structure for trading purposes (getting an IDSA, for example, or using it to manage SPVs), as some types of instruments (again, the IDSA comes to mind and so do 144A securities) have strict requirements as to who can invest in them on both a Net Worth and Savviness level. While it is less so for Net Worth, by using an LP/LLC structure, your management company can qualify for a status called QIB - Qualified Institutional Buyer - indicating that you are financially sophisticated and understand the risks of investing beyond the regular person.
Frieds - thanks for that. So
Frieds - thanks for that. So the LP owns 100% of the LLC?
No... the structure would be
No... the structure would be as follows... The LLC acts as the management company and serves as the General Partner for the Hedge Fund which is structured as a LP.
I want to open a hedge fund. I hire an attorney and pay all the fees to open up Frieds Capital Management LLC. Their job is to be an investment manager/advisor for hire. Everyone employed by Frieds Capital Management is paid by FCM LLC. They are there solely to act as the fund management team and investment advisor. Now, I start raising capital for my first fund... lets call it the "FCM Lebowski Fund, LP". The sole purpose of the Lebowski Fund is to invest in bowling, booze, weed, nihilsts and rugs, especially rugs that tie the room together. I find capital to raise, but I need to use the LP structure in order ot make sure that 1) my investors are protected from harm baring loss of capital and 2) to keep unauthorized partners from transacting on behalf of the fund.
So, I have my LP, and The Lebowski Fund hires FCM LLC to be the General Partner in the fund. FCM LLC signs the partnership agreement, which specifies all of the rules and investment guidelines of the fund. In return for signing up as the GP, gets to make all the decisions on which bowling alleys, booze companies, weed-related investments, nihilist shills and rugs to buy provided they are within the guidelines of the agreement signed between FCM and the Lebowski fund. Now that the GP is in place, I go out and start rasing funds. I get $25MM in investor capital. The investors sign on as Limited Partners and own a portion of the LP in relation to the amount of their investment. The GP also owns a small percentage of the fund, but has different liabilities than his investors do.
So, in recap: LLC is Management company hired by LP to run the fund. LP is entity to invest through.
This should be on every
This should be on every thread that has to do with how a PEF/HF is structured and run. +1 imaginary SB.
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Why is it illegal to manage
Why is it illegal to manage other peoples money under a personal trading account?
Covestor is a good solution
Covestor is a good solution that shouldn't cost you anything. I am not sure about all the details, but one of buddy's runs a fund on this sight and it seems pretty easy
http://covestor.com/
AgreeWitMe wrote: Why is it
Why is it illegal to manage other peoples money under a personal trading account?
Also interested. Is it even illegal?
Excellent advice Frieds. OP,
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Frieds wrote: No... the
LIBOR wrote: Excellent advice
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I've also noticed that a
How much money would be
One thing I've always
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Frieds -- LLCs are not
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Honest answer to starting a
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