3/6/11

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.

Comments (116)

3/6/11

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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10/27/11

I think you should start a Private Equity Fund

7/10/13

Are you going to gain tangible knowledge? Yes? Do it!

1/1/14

Dwochele:

Would it hurt to try

You tell me if not going to college or getting a FT job or experience would hurt to try

"Look, you're my best friend, so don't take this the wrong way. In twenty years, if you're still livin' here, comin' over to my house to watch the Patriots games, still workin' construction, I'll fuckin' kill you. That's not a threat, that's a fact.

9/4/15

bumpity bump

Oh you have a lot of swag ? Why don't you go put that on your resume now.

3/6/11
alexpasch:

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?

10/17/16

I've seen this on the Wall Street Journal, do you think it would work?

Surgical Center and Hospital Conversion
Seeks $15M, $50K per Investor,
Attorney Escrow.
Equity back plus 10% Interest
Call Ernest 405-501-4022

3/7/11
alexpasch:

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?

6/19/15
alexpasch:

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...

What are the disadvantages of doing everything under one LLC or LP instead of LP and LLC?

10/27/11

You want to start a hedge fund, but you're asking what one is "in simple terms"?

Makes sense to me.

7/10/13

Is it really a hedge fund where you're playing with other peoples money or is it just some rich guy who is starting a prop/family type office??

Honestly..5-10 hours a week is not much time and it'd be very good experience if you're the type of person who is a self starter

alpha currency trader wanna-be

1/1/14

Dwochele:

Ok so say your fresh out of high school and you have a very good trading strategy, so you were able to trade for some years and save a good 100k and where self educated and had connections. Would you be able to start a hedge fund? Would it be smart? Becouse the way I see it is if you try when your 19 years old and you fail you can get right back up, also you would be able to go back to college or work at a small firm and get a little more experience. Would it hurt to try

I'm assuming this is a troll, as you have posted on two other parts of the forum.

9/6/15

ask yourself this question: imagine if you were in the shoes of some high net worth individual (say, $100mm) who has investments in, say 10 different hedge funds / VC funds / private equity funds ($2-5mm invested per fund) and together in aggregate they avg you 10-15%/year...and then the real you comes along with your proposal for your new fund. Would you give "you" a shot?

It all depends on the specifics of your proposal....and the risk tolerance of the HNW individual...

9/7/15
ironnchef:

imagine if you were in the shoes of some high net worth individual (say, $100mm) who has investments in, say 10 different hedge funds / VC funds / private equity funds ($2-5mm invested per fund) and together in aggregate they avg you 10-15%/year...and then the real you comes along with your proposal for your new fund. Would you give "you" a shot?

I totally understand what you are saying but everybody has to start somewhere right. Just because I'm not some Ivy League hotshot who has spent time at major Wall St. firms does that mean I'm fit for nothing and I'm destined for total loserdom ?

Steven Shwartzmann studied interdisciplinary science for his undergrad and he got his first break when Prudential gave him $100 million to manage. You can actually see the video here he talks about it:
https://youtu.be/mKmtJ3Bjy24?t=629

10:40 - 11:04

I'm not saying I'm as smart as him all I'm saying hasn't everyone depended on someone to help them achieve their ambition. Clearly one guy's good mood and impression of S.S. during lunch time on some random day in Newark, NJ changed the aforementioned's life forever.

Oh you have a lot of swag ? Why don't you go put that on your resume now.

9/7/15

So what's your actual question? Seems like you asked a rhetorical question to seek confirmation, which is very typical here. You simply wanted to hear that you don't have to be a "hot shot Ivy Leaguer" to get money, then sure you don't have to be.

If you're banking on having no track record, but a grand idea and some HNW is going to invest in you, then sure it could happen. Lighting strikes the same person twice too.

9/7/15

[quote="IvyLeagueVet"]

<

p>So what's your actual question? /quote]

What is the general route for starting a hedge fund and how do most go about it. For me VC funding is relatively easier to understand as you can pitch them via email and if they have time they'll reply.

But starting a hedge fund ? Is it all based on who you know, your own earnings, or are there also funds of funds (funds that are open to investing in new funds) that you can contact ?

I'm not banking on having 0 track record by the way, I just wanted to know what the roadmap looks like. I'm at a stage in my life where if I'm fortunate enough to go down a certain path it would allow me to gain significant experience in a particular asset class which is something I'm passionate about. I've been reading a book on people in the said field and how they used their experience for starting successful funds.

The only issue is the individuals that started their funds made so much money in their field initially because of their own talent that the funds they started were entirely capitalized with their own earnings (7 figures). I'm not sure if I'll make such money but I still find fund management interesting so I wanted to know whether there was a route if you weren't rich yourself.

For example in Silicon Valley they have networking events where people go to meet deep pocketed individuals to talk about ideas. I'm just wondering do such things happen in the hedge fund world for wannabe fund managers/owners.

Oh you have a lot of swag ? Why don't you go put that on your resume now.

9/7/15

VCs invest in people w ideas BC they have potential. Can anyone contact a VC and ask for a seed? Sure but that isn't likely wout something tangible resembling potential (research papers, patents, etc). As for FoFs investing in you, that's usually BC you show some potential and that potential comes from your track record.

HF route is really simple, either you know/worked w people who'll invest in you or you have a track record that people will invest in. You'll be very hard pressed to get the ears of FoFs w neither a track record or connections.

9/9/15
oligarch:

<

p>Steven Shwartzmann studied interdisciplinary science for his undergrad and he got his first break when Prudential gave him $100 million to manage.

That is quite a mischaracterization of history. Pete Peterson was Chairman and CEO of Lehman Brothers Kuhn Loeb. Steve Schwarzman was Head of M&A of Lehman Brothers Kuhn and Loeb after becoming an MD at 31 after joining Lehman at 25. Prudential did not just "give him" $100 million to manage.

3/7/11

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...

10/27/11

If your only goal is becoming a billionaire, I suggest following the Madoff model.

7/10/13

watersign:

Is it really a hedge fund where you're playing with other peoples money or is it just some rich guy who is starting a prop/family type office??

Honestly..5-10 hours a week is not much time and it'd be very good experience if you're the type of person who is a self starter

It could also serve as a resume builder (if the work he would be doing is any good)

1/1/14

Wtf is this? I'm no Edgar Allen Poe but learn how to write before you think of hedge funds.

9/7/15

I'd worry more about being highly profitable first. If you have your own money to trade and grow, all the better. If you need to be financed, look to friends and family first. Start small, build your track record, and solicit outside funding later.

3/7/11
Bi-Winning:

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....

The answer to your question is 1) network 2) get involved 3) beef up your resume 4) repeat -happypantsmcgee

WSO is not your personal search function.

1/1/14

And you just said wtf?

1/1/14

There's a reason that very intelligent people go to college and do all that boring shit instead of just pounding out max margin trades using their family's money until they amass a fortune.

Trust us on this one. Don't do it.

Equities are for chumps.

3/7/11
Bi-Winning:

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.

3/7/11

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...

10/27/11

Jesus Christ.

There have been many great comebacks throughout history. Jesus was dead but then came back as an all-powerful God-Zombie.

7/10/13

If you will get any experience it's better than no experience at all.

1/1/14

I think that knowing the difference between your and you're is a prerequisite for starting a hedge fund.

Under my tutelage, you will grow from boys to men. From men into gladiators. And from gladiators into SWANSONS.

9/7/15

Or just go Michael Burry style and start a blog. If you are good, soon your performance will be proven and people will come to you. Your knowledge means shit without any track record (i.e.Long term capital mgmt). And even your track record isn't reflective of your future performance. The people who successfully started a hedge fund have much more than those two.

10/27/11
Kenny_Powers_CFA:

Jesus Christ.

Facepalm.

patternfinder:

Of course, I would just buy in scales.

See my WSO Blog | my AMA

10/27/11

Or the Jesus Christ model. That one's good too.

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7/10/13

also keep in mind, he may be great for your network and be able to refer you to some people. 5-10 hours is an easy commitment too.

1/1/14

Well in order to trade for others you need licenses and they all have requirements. I doubt a high school kid would meet the requirements for the series exams you would need to pass in order to trade on behalf of clients.

9/7/15

The whole idea of "hot shot ivy leaguer" or whatever background is irrelevant. Someone asked "would you invest in you?" - that's the relevant question.

Generally starts with starting your own fund w/ family / friends and maybe a little seed money after you have a track record in the industry. Your background is largely irrelevant when it comes to the school you went to - LPs carry about whether or not youre going to generate alpha and make them money. It's an opportunity cost for them to reallocate funds from Greenlight / Pershing to your fund and those LPs will need some sort of track record that the PM can point to.

1/1/14

I read that since hedge funds are not highly regulated by the sec you don't need a requirment

1/1/14

Dwochele:

I read that since hedge funds are not highly regulated by the sec you don't need a requirment

The licensing would be your dead last concern. Having a viable strategy and getting clients would be huge obstacles. Do you think the guy who runs a major pension would risk his job to give you some money?
1/1/14

He wouldn't but maybe a multimillionaire looking for a good investment

1/1/14

Dwochele:

He wouldn't but maybe a multimillionaire looking for a good investment


Here's the deal: how does a millionaire know you and your fund would be a good investment? If you want to just trade your own account, no one is stopping you. However, opening a fund means convincing people to give you money to trade, instead of some other guy. If you really think that you can do that, then there's really nothing from stopping you from ultimately setting up a fund.

It is highly unlikely that the financial establishment will pay much attention to you, so you'd need to get funding from other people. There are good reasons for this: trading is a tough business to do for a living and people are more likely to be convinced by a person who is educated, who gets training at a successful company, and who builds a track record of success. This doesn't mean that you necessarily can't open up your own fund right now, it just means you are forgoing the benefit of a college education, employer training, and real world experience under the guidance of people more knowledgeable than yourself. Your competition will have all of these things. You'd be hard pressed to find a millionaire that doesn't recognize this.....usually.

The problem here is that you present like a child and not a person I'd hand over lots of money to.

On a side note, I find it mildly ironic that the automatic reaction of everyone on the site is ridicule given the primary hero of this website (Eddie) openly looks down on college, big banks, and the financial establishment....and he earned lots of money doing so. Finance seems less and less meritocratic to me, and more and more like medicine: educational pedigree, title, family connections, and employer brand name are more often used to judge people than their actual P&L or ability to get results. It's a mature industry who's heyday has passed. At least in the short-medium term. I have to be honest: sometimes I laugh to myself when someone who has never started a business or made a good call on the markets brags to me about their job in 'finance'. They're an employee, not a businessman.

But I digress.

Bottom line: if you realistically think you can 1) get people to give you money and 2) consistently turn a profit, then it is possible. How, I have no idea, it's not what I do. If you're not 100% sure, then don't do it. If you would not be able to recover from the failure....then you can't afford the risk and shouldn't do it. If you have wealthy relatives willing to throw some money your way, then obviously that changes things.

I'd seriously suggest you go to college and continue trading your own account. If you're as good as you say you are, you will find a firm willing to hire you at some point, and after a while there you will have the support to start a fund. Just make sure you're realistic....if this was easy, everyone would do it.

Get busy living

1/1/14

You shouldn't need any licenses to trade other's money or setup a HF. What you will need is intelligence and the ability to source investor capital with well written statements and phone calls (something I'm not sure you can do right now). If you can get a self-made millionaire that's 60 years old to hand you a few mil, then by all means, prove us all wrong.

3/7/11

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.

10/27/11

Haha this is so funny, good laugh.

9/7/15

@JackandDaniels

Thank you that's all I needed to hear. As far as the Ivy league comment is concerned that's because I've always suffered from an inferiority complex for going to a humble state school.

Oh you have a lot of swag ? Why don't you go put that on your resume now.

3/7/11

Frieds - thanks for that. So the LP owns 100% of the LLC?

10/27/11

I'm pretty sure hedge fund managers know how to use google pal...

9/9/15

Cross-posting below my answer to a very similar question asked ~3 months ago (where the poster wanted to know how to develop a track record that would allow him to begin gathering assets).

In your case, you need to begin a track record, something that other poster was ahead of you on. This means you need to start trading with audited books. Anyone with half a brain would tell you that there's value to learning a product or apprenticing yourself to an investor you respect by spending meaningful time on a sell-side trading desk or at a buy-side shop.

If you feel like you're comfortable taking the entirety of your net worth in your own hands, begin trading under your own name. Alternatively, some guys will get a PM (portfolio manager) title at their current shop and leverage that down the road as their track record because they can show prospective LPs an audited record of how their book performed.

[If you want to get institutional investors:]

Pool your own money along with whoever you can convince to let you invest on their behalf. If you can reach the scale where you can afford the six-figure cost of forming a proper GP entity, get it set up and registered properly (likely a multi-vehicle structure: i) a Delaware Limited Partnership for the fund, ii) a Delaware Limited Partnership for the General Partner of the LP, and iii) a Delaware LLC as the General Partner of the General Partner). Get the friends, family, coworkers, or whoever else gave you money into the fund as LPs.

(Edit for clarity: the cost mentioned comes from using a BigLaw firm, not for actually registering with the relevant regulatory bodies.)

Have your performance audited by a legitimate firm. Big 4 can be prohibitively expensive when managing a tiny capital base; respected regional firms like BDO or Berdon are acceptable affordable alternatives. None of these will be cheap, but you get points on two fronts: firms of that stature have strong reputations, and you convincing them that you're worth taking as a client is a signal in itself. Show at least 10 quarters of performance, and then do your best to identify and get in contact with institutions with mandates for emerging managers.

[If you want to run money for friends and family (joking, the 'FFF round,' or 'friends, family, and fools'):]

Depending on the sophistication of the investor, you may be able to get away with simple brokerage account statements, but the safest bet is to create business banking accounts, institutional brokerage accounts (you'd be surprised at how low the AUM minimums are for bulge bracket desks to take you as a client), and have your numbers audited. This is simply a good governance protocol, and if you get a few million to manage, over a few years (with good performance) your capital base will swell from appreciation plus your investors wanting to plug in more and telling their friends.

Most people do things to add days to their life. I do things to add life to my days.

Browse my blog as a WSO contributing author

Best Response
3/7/11

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.

10/27/11

@ all those Sarcastic replies : I believe in this : "Your time is limited, so don't waste it living someone else's life. Don't be trapped by dogma - which is living with the results of other people's thinking. Don't let the noise of other's opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary." - Steve Jobs'

9/9/15
oligarch:

I know tonnes of PhDs and hotshot Ivy League or former NASA engineers that have got funding purely based on their intellectual capabilities and industry experience.

Sounds a lot like LTCM, what could possibly go wrong?

7/26/11
Frieds:

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.

Why does the fund itself have to be an LP? can it be an LLC instead, with the MP being another LLC? Why does it have to be an LLC managing an LP, rather than an LLC managing another LLC?

10/27/11
adarsh_bl:

@ all those Sarcastic replies : I believe in this : "Your time is limited, so don't waste it living someone else's life. Don't be trapped by dogma - which is living with the results of other people's thinking. Don't let the noise of other's opinions drown out your own inner voice. And most important, have the courage to follow your heart and intuition. They somehow already know what you truly want to become. Everything else is secondary." - Steve Jobs'

huh...

starting your own hedge fund is not really escaping dogma. But to each his own I guess.

patternfinder:

Of course, I would just buy in scales.

See my WSO Blog | my AMA

12/4/13

Frieds:

No... the structure would be as follows... 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 what do you mean by 1)? If investors are protected from loss of capital, how does the LLC pay back the investor his money? I don't know what you mean by "harm baring loss of capital." Somebody has to pay.

7/6/16

just wanted to thank you, Frieds, for your excellent commentary on this.. I found it very informative

3/7/11

This should be on every thread that has to do with how a PEF/HF is structured and run. +1 imaginary SB.

10/27/11

LOl.

9/10/15

Zero percent. I can't believe people even took the time to write long replies to such a ridiculous OP.

9/10/15

If you're saying I'm trolling this is nothing comparing to my real trolling ability.

Anyhow, how are the equity bases of most hedge funds financed during inception ? Any worthwhile knowledge shared would be much appreciated.

Oh you have a lot of swag ? Why don't you go put that on your resume now.

3/7/11

Silver banana awarded - awesome rundown! Thank you.

10/29/11

Dont know you adarsh so not doubting you but if your one reason to start a hedge fund is to make money you have no idea what it takes and the money wont keep you going. Wake up and learn something than make ridiculous statements. Have some struggles, overcome them, then make a ridiculous post like this.

9/10/15

The first step to any hedge fund ever is creating a thread on WallStreetOasis asking about how to start a hedge fund.

3/11/11

Why is it illegal to manage other peoples money under a personal trading account?

9/21/15

Anything is possible, but without a track record from a successful/prominent hedge fund your chances are very limited unless you have a family member to back you

3/13/11
AgreeWitMe:

Why is it illegal to manage other peoples money under a personal trading account?

Also interested. Is it even illegal?

3/13/11

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/

3/13/11

Excellent advice Frieds.

OP, check out this article. It mentions a similar idea.
http://www.fwallstreet.com/article/170-how-to-star...

looking for that pick-me-up to power through an all-nighter?
7/26/11

Excellent advice Frieds.

OP, check out this article. It mentions a similar idea.
http://www.fwallstreet.com/article/170-how-to-star...

Thanks, LIBOR...I bookmarked this website.

3/13/11

Libor,

Great link... Clearly it's possible to do it on the cheap, but I'd rather do it right the first time than not do it right at all. It's so much easier that way.

NYFinance, while I like that you brought up Covestor, it's a very price prohibitive measure. I don't know how much the OP is being given, but it's a far more expensive task using Covestor than it's worth, especially since we don't know how much is being invested.

Agree, FGH, the reason why it is illegal is due to the tax implications associated with investing. Even if it is a long term time horizon, there are still implications which need to be resolved.

7/26/11

Gator, I believe the term your looking for is GP, not MP. Now, while it is possible to use a multi-LLC structure, you have to consider the issues of taxation (especially with double taxation using an LLC as the fund itself) associated with both types of structure and protection from lawsuits. The benefits of using a Limited Partnership structure allow for a single taxation, and while the GP is exposed to unlimited liability in the event of a Lawsuit, he is protected by the fact that the GP will be an LLC, thus covering the individuals who are running the fun sufficiently enough. An LLC, while providing management companies from the liability exposure they wouldn't have as an LP, still has the double taxation associated with it because of the structure they are using.

7/27/11

I've also noticed that a number of reputable US banks are now offering back office products for hedge funds. Has anyone used these? If so, what do you like or not like about them? Is the cost reasonable?

10/24/12

How much money would be reasonable to start this fund? Do we need millions of dollars like most people say or can we start with...let's say $30k?

10/24/12

One thing I've always wondered is what the technical difference is between a "hedge fund" where all partners have to be "accredited investors" vs. just a regular limited partnership with an LLC (the management company) as the general partner and clients as limited partners (this setup was mentioned several times above). Why does a "hedge fund" that uses this structure need accredited investors? Why can't you run a hedge fund without accredited investors? I hope this question makes sense.

10/24/12
idkmybffjill:

One thing I've always wondered is what the technical difference is between a "hedge fund" where all partners have to be "accredited investors" vs. just a regular limited partnership with an LLC (the management company) as the general partner and clients as limited partners (this setup was mentioned several times above). Why does a "hedge fund" that uses this structure need accredited investors? Why can't you run a hedge fund without accredited investors? I hope this question makes sense.

Private partnerships require you have accredited investors, not just hedge funds. All of this is in flux right now, but 3-c-1 funds require $1 million net worth or income requirements and allow you up to 99 investors (very few funds use this structure anymore); 3-c-7 funds require investors to have a $5 million liquid net worth and you can have up to 499 investors. I say this is in flux because the JOBS act will likely expand the number of investors allowed in these funds. There is no legal definition of "hedge fund".

For other people considering what the OP was considering, I suggest you set up as an RIA and take discretion over separate accounts. The legal and accounting bills will kill you if you set up a fund with that small of an asset base.

10/27/12
SirTradesaLot:
idkmybffjill:

One thing I've always wondered is what the technical difference is between a "hedge fund" where all partners have to be "accredited investors" vs. just a regular limited partnership with an LLC (the management company) as the general partner and clients as limited partners (this setup was mentioned several times above). Why does a "hedge fund" that uses this structure need accredited investors? Why can't you run a hedge fund without accredited investors? I hope this question makes sense.

Private partnerships require you have accredited investors, not just hedge funds. All of this is in flux right now, but 3-c-1 funds require $1 million net worth or income requirements and allow you up to 99 investors (very few funds use this structure anymore); 3-c-7 funds require investors to have a $5 million liquid net worth and you can have up to 499 investors. I say this is in flux because the JOBS act will likely expand the number of investors allowed in these funds. There is no legal definition of "hedge fund".

For other people considering what the OP was considering, I suggest you set up as an RIA and take discretion over separate accounts. The legal and accounting bills will kill you if you set up a fund with that small of an asset base.

Wait, so you're saying you can't set up ANY sort of partnership without having accredited investors? If a friend and I wanted to set up a partnership with me being the general partner and him being the limited partner for a lawn mowing business but we also wanted to buy/sell stocks, we can't do that because we aren't accredited investors?

I feel like I'm missing something in my understanding....can you help fill the gap? lol

10/27/12
idkmybffjill:
SirTradesaLot:
idkmybffjill:

One thing I've always wondered is what the technical difference is between a "hedge fund" where all partners have to be "accredited investors" vs. just a regular limited partnership with an LLC (the management company) as the general partner and clients as limited partners (this setup was mentioned several times above). Why does a "hedge fund" that uses this structure need accredited investors? Why can't you run a hedge fund without accredited investors? I hope this question makes sense.

Private partnerships require you have accredited investors, not just hedge funds. All of this is in flux right now, but 3-c-1 funds require $1 million net worth or income requirements and allow you up to 99 investors (very few funds use this structure anymore); 3-c-7 funds require investors to have a $5 million liquid net worth and you can have up to 499 investors. I say this is in flux because the JOBS act will likely expand the number of investors allowed in these funds. There is no legal definition of "hedge fund".

For other people considering what the OP was considering, I suggest you set up as an RIA and take discretion over separate accounts. The legal and accounting bills will kill you if you set up a fund with that small of an asset base.

Wait, so you're saying you can't set up ANY sort of partnership without having accredited investors? If a friend and I wanted to set up a partnership with me being the general partner and him being the limited partner for a lawn mowing business but we also wanted to buy/sell stocks, we can't do that because we aren't accredited investors?

I feel like I'm missing something in my understanding....can you help fill the gap? lol

Any partnership where you take money (as far as I know, I'm not a lawyer). If you take discretion on a separate account (let's say it's custodied at Schwab or whatever), the clients do not need to be accredited investors, so you can buy securities for them.

In your example, you could probably buy and sell stocks for your own account, but when you start managing money for others, you need to register as an investment adviser (series 63) in the states where your clients reside until you get to something like $100 million in AUM and then you register with the SEC.

10/28/12
SirTradesaLot:
idkmybffjill:
SirTradesaLot:
idkmybffjill:

One thing I've always wondered is what the technical difference is between a "hedge fund" where all partners have to be "accredited investors" vs. just a regular limited partnership with an LLC (the management company) as the general partner and clients as limited partners (this setup was mentioned several times above). Why does a "hedge fund" that uses this structure need accredited investors? Why can't you run a hedge fund without accredited investors? I hope this question makes sense.

Private partnerships require you have accredited investors, not just hedge funds. All of this is in flux right now, but 3-c-1 funds require $1 million net worth or income requirements and allow you up to 99 investors (very few funds use this structure anymore); 3-c-7 funds require investors to have a $5 million liquid net worth and you can have up to 499 investors. I say this is in flux because the JOBS act will likely expand the number of investors allowed in these funds. There is no legal definition of "hedge fund".

For other people considering what the OP was considering, I suggest you set up as an RIA and take discretion over separate accounts. The legal and accounting bills will kill you if you set up a fund with that small of an asset base.

Wait, so you're saying you can't set up ANY sort of partnership without having accredited investors? If a friend and I wanted to set up a partnership with me being the general partner and him being the limited partner for a lawn mowing business but we also wanted to buy/sell stocks, we can't do that because we aren't accredited investors?

I feel like I'm missing something in my understanding....can you help fill the gap? lol

Any partnership where you take money (as far as I know, I'm not a lawyer). If you take discretion on a separate account (let's say it's custodied at Schwab or whatever), the clients do not need to be accredited investors, so you can buy securities for them.

In your example, you could probably buy and sell stocks for your own account, but when you start managing money for others, you need to register as an investment adviser (series 63) in the states where your clients reside until you get to something like $100 million in AUM and then you register with the SEC.

Ah okay, Got it. I am a bit confused on something though....from googling this, it appears there is a series 63, 65, and 66 exams. Some places say take the 65. What is the difference between the three? Seems confusing.

11/5/12
idkmybffjill:

Ah okay, Got it. I am a bit confused on something though....from googling this, it appears there is a series 63, 65, and 66 exams. Some places say take the 65. What is the difference between the three? Seems confusing.

---.wallstreetoasis.---/forums/licensing-for-dummies (can't post the www /.com, it seems a bit ironic I can't link to the site..)
"The Series 65 is the Registered Investment Advisor exam. This exam is required for money managers, investment advisors and anyone that manages funds on a non-commission basis."
If you want to run a hedge fund, that's you. The 66 would count for both the 63 and 65, but you need to pass the series 7 before you take it; its a lot more work than the 65 if all you want to do is be an RIA.

10/24/12

Frieds -- LLCs are not subject to double taxation, C-corps are. I think some funds are set up as LLCs now. We decided against using an LLC structure for a fund primarily because most investors would be unaccustomed to it. I couldn't tell you any advantages or disadvantages of using an LP or LLC structure for a fund, I don't think it's a huge difference one way or the other.
http://en.wikipedia.org/wiki/Limited_liability_com...

10/24/12
SirTradesaLot:

Frieds -- LLCs are not subject to double taxation, C-corps are. I think some funds are set up as LLCs now. We decided against using an LLC structure for a fund primarily because most investors would be unaccustomed to it. I couldn't tell you any advantages or disadvantages of using an LP or LLC structure for a fund, I don't think it's a huge difference one way or the other.
http://en.wikipedia.org/wiki/Limited_liability_com...

LLCs can elect how to be taxed - they can use the S Corp, C Corp, Sole Prop or Partnership taxation qualifications depending on whether or not they meet the criteria for those types of taxation. I'm assuming the highest tax burden here is all.

10/24/12
Frieds:
SirTradesaLot:

Frieds -- LLCs are not subject to double taxation, C-corps are. I think some funds are set up as LLCs now. We decided against using an LLC structure for a fund primarily because most investors would be unaccustomed to it. I couldn't tell you any advantages or disadvantages of using an LP or LLC structure for a fund, I don't think it's a huge difference one way or the other.
http://en.wikipedia.org/wiki/Limited_liability_com...

LLCs can elect how to be taxed - they can use the S Corp, C Corp, Sole Prop or Partnership taxation qualifications depending on whether or not they meet the criteria for those types of taxation. I'm assuming the highest tax burden here is all.

That's true...fair enough.

10/27/12

Honest answer to starting a "small hedge fund" ... run under the table until you're big enough to not be able to hide it anymore. If you're sub seven figures, you'll be fine.

4/19/14

WhiteHat:

Honest answer to starting a "small hedge fund" ... run under the table until you're big enough to not be able to hide it anymore. If you're sub seven figures, you'll be fine.


Hehe shh thats our dirty little secret dude..
3/3/16

Run it as just an LLC or LP with the LLC managing it? What do you suggest as just running it under the table?

10/31/12

I don't think you need to get any series...I would be really shocked if people like Ackman or Einhorn took the Series 63...

11/5/12
wanttolearn:

I don't think you need to get any series...I would be really shocked if people like Ackman or Einhorn took the Series 63...

Can anyone confirm/deny that? Someone at the firm has to have it right? otherwise, how can they be operating as an investment manager?

ValueWannabe:
idkmybffjill:

Ah okay, Got it. I am a bit confused on something though....from googling this, it appears there is a series 63, 65, and 66 exams. Some places say take the 65. What is the difference between the three? Seems confusing.

---.wallstreetoasis.---/forums/licensing-for-dummies (can't post the www /.com, it seems a bit ironic I can't link to the site..)
"The Series 65 is the Registered Investment Advisor exam. This exam is required for money managers, investment advisors and anyone that manages funds on a non-commission basis."
If you want to run a hedge fund, that's you. The 66 would count for both the 63 and 65, but you need to pass the series 7 before you take it; its a lot more work than the 65 if all you want to do is be an RIA.

Thank you. So, to get the series 65, you don't need a series 7 beforehand, correct? Also, what is the purpose of the series 63?

11/5/12

Fix the link I posted above - it has a lot more information about the 63/66 and pretty much every other financial licence. Yes though, you don't need to take the series 7 to take the 65.

I also just remembered, you may not need to be an RIA to open an investment fund if you have 5 or less investors, depending on the state. I know its that way in New Jersey where I am. I can't find the actual NJ regulation, but http:/---.strictlybusinesslawblog.---/2011/09/11/state-investment-adviser-registration-requirements-for-private-fund-managers-part-6-the-northeast/ (www / com) lists the info for states in the north east, I'm sure you can find the regs for your state from there.

It might also be possible to include non-accredited investors, but I'm not a securities lawyer (talk to one before you try it). Read 'Reg D' if you're curious http://www.sec.gov/answers/regd.htm

4/24/14

wanttolearn:

I don't think you need to get any series...I would be really shocked if people like Ackman or Einhorn took the Series 63...

I know this is two years ago but you can do a broker check for these things http://brokercheck.finra.org/Search/SearchResults.... "william Albert Ackman"

4/24/14

Costakapo:

wanttolearn:

I don't think you need to get any series...I would be really shocked if people like Ackman or Einhorn took the Series 63...

I know this is two years ago but you can do a broker check for these things http://brokercheck.finra.org/Search/SearchResults.... "william Albert Ackman"


And to add on to my own post - looks like Ackman had his exams waived due to other qualifying circumstances. http://www.adviserinfo.sec.gov/IAPD/Support/Report...
11/10/12

Wow. I find the Internet so exciting. I was thinking today about forming a Limited Partnership of about 25 people here in our Independent Living facility for the sole purpose of being able to do some investing through a program with Stansberry & Associates. By doing this we can start out with $1,000 per person whereas none of us would want to invest $25,000 each. My thinking is that we could work together within the LP and if, say, in one year we see it would be nice to eah continue investing on our own we could just vacate the LP and let it run out or dissolve it. Your help will be greatly appreciated. Also, as Managing Partner would it be necessary for me to invest the thousand if I am going to be doing the work?

12/1/13

So if I set a LP and a LLC, Do my limited partners (aka investors) need to be accredited investors for the LLC to manage their money?

12/1/13

Is it true that you can set the actual fund up in the grand cayman islands and a management company LLC here in the states? If you do it this way (in theory) you could accept non accredited investors.

We're running out of oil....sike!

12/3/13

CrashCourse1:

Is it true that you can set the actual fund up in the grand cayman islands and a management company LLC here in the states? If you do it this way (in theory) you could accept non accredited investors.

Kinda like what the Swiss and HK companies do to evade taxes?

But if you are trading/investing in the US stock equity market, and as the owner of the LLC which is a US citizen, you are still bound to pay taxes like every other US citizen, correct?

12/4/13

slim_ibd_shady:

CrashCourse1:

Is it true that you can set the actual fund up in the grand cayman islands and a management company LLC here in the states? If you do it this way (in theory) you could accept non accredited investors.

Kinda like what the Swiss and HK companies do to evade taxes?

But if you are trading/investing in the US stock equity market, and as the owner of the LLC which is a US citizen, you are still bound to pay taxes like every other US citizen, correct?

Sure pay taxes, but can you trade an account that is set up off shore for the sole purpose of trading other peoples money and non accredited investors?

We're running out of oil....sike!

12/3/13

location??

I love my bananas!

12/3/13

If you start a "fund" all by yourself, you trade/invest with your own money ONLY (no outside investors) under your personal individual account with a discount retail broker, do you still have to go through the proper structuring? If you do file for an LLC and LP, can you lower your capital gain tax by trading through a business account?

12/4/13

We need someone experienced to lay these answers out for everyone

12/4/13

What happens when the fund looses all the money? How does the LLC "protect" the partners aka investors in the LP? Don't the partners in the LP aka "limited" have limited liability or do I have this wrong? I still need to know if the LLC can invest funds from non-accredited investors. I mean if the partners aka investors in sign a contract letting the LLC manage their funds, it's fair game right?

12/15/13

Prudent,

I'm going to be straight up with you. If you don't know what the word Barring means (and yes, I'm aware of the typo in my spelling in the original post from over 2 years ago - yes, that's right, 2 years ago), then you shouldn't be in Finance. Barring, comes from using the word Bar as a transitive verb meaning to exclude, usually by exception. So, know that I've told you what Barring means, can you translate this sentence: "my investors are protected from harm baring loss of capital."

I'll help you - "My investors" - the people who have entrusted their money with my hypothetical fund by investing in the LP - "are protected from" - don't have much to worry about being sued, having legal action taken against them, etc. - "harm" - anything that could go wrong from from management/operations/potential investment (see: vulture investing) that may result in legal actions being taken against the Fund's GP provided that the Fund's GP is not doing anything that is illegal - "barring" - Excluding - "the loss" - the not making and potential hemorrhaging of - "Capital" - any monies provided the investors into the LP.

So, with the translation - The investors have a certain degree of legal protection afforded them as LPs and don't need to worry about any sort of bad juju (provided the fund is above board) except for potentially losing their shirt in the investment.

Happy now? Or do you want me to continue answering your questions and breaking them down like this?

12/15/13

Frieds:

Prudent,

I'm going to be straight up with you. If you don't know what the word Barring means (and yes, I'm aware of the typo in my spelling in the original post from over 2 years ago - yes, that's right, 2 years ago), then you shouldn't be in Finance. Barring, comes from using the word Bar as a transitive verb meaning to exclude, usually by exception. So, know that I've told you what Barring means, can you translate this sentence: "my investors are protected from harm baring loss of capital."

I'll help you - "My investors" - the people who have entrusted their money with my hypothetical fund by investing in the LP - "are protected from" - don't have much to worry about being sued, having legal action taken against them, etc. - "harm" - anything that could go wrong from from management/operations/potential investment (see: vulture investing) that may result in legal actions being taken against the Fund's GP provided that the Fund's GP is not doing anything that is illegal - "barring" - Excluding - "the loss" - the not making and potential hemorrhaging of - "Capital" - any monies provided the investors into the LP.

So, with the translation - The investors have a certain degree of legal protection afforded them as LPs and don't need to worry about any sort of bad juju (provided the fund is above board) except for potentially losing their shirt in the investment.

Happy now? Or do you want me to continue answering your questions and breaking them down like this?

Epic typo at the end of the first paragraph...detail is key with legal jargon

1/6/14

Now that's what I'm talking about! I just like to understand things. Thanks man.

1/7/14

If that's really the answer you want with such a breakdown, my advice to you is keep a dictionary on hand and look shit up yourself. Nothing is better than being able to read the dictionary and look up words yourself. Try it some time. You might be surprised.

1/7/14

Haha. Nice.

1/7/14

Lol Frieds is getting a little emotional...I like it!

4/14/14

Check out Green Company (you can Google them). They are a good starting point. A peer of mine established an incubator fund where he managed his own money and also friends and families money, but under 25 people. He set up the LLC as the management company and the LP as the fund and we all came in at LP's. The structure would not allow him to be compensated, but he was able to establish a track record of performance with a goal of ultimately going to a full fledged hedge fund with hopes of attracting accredited investors and being compensated. We would automatically become investor's in the full fledged hedge fund as we were part of the incubator as all of us were not accredited investors.

He used Green Company for the accounting and taxes and used legal zoom to set up the LLC and LP, but he got some assistance from Green & Co in the legal process. All in all I think he paid about $10-$15k to get it set-up.

4/17/14

Let's say John runs a fund while Mom and Dad are his investors and his Uncle and Aunt might join in the future. He wants a master-feeder structure so he creates a NY LLC to manage the fund, a Delaware LP to take in investor capital (the feeder), and then a Cayman company to make all the trades that the NY LLC decides on.

When you create an LP, doesn't it ask for the owners upfront? Just list Mom and Dad? Is John also an owner (I thought he's required to own a percentage)? Is the LLC a partner in the LP or just John?

Who owns each of these?
Management LLC
Feeder LP
Master Co

4/24/14

Mogul:

Who owns each of these?

Management LLC

Feeder LP

Master Co

Quick breakdown (from a top-down perspective):

Management Company LLC - owned by the founder and employees of the hedge fund, or whoever else has a stake in the actual business of being an Asset Management firm. Put another way, this is the company that's publicly-traded for companies like BX or OZM. This company will act as the General Partner to the Master Fund.

Feeder Fund LP - owned by the people who are investing their money with the hedge fund, like institutional investors and high net worth individuals. These people will get an ownership stake in Feeder Fund LP proportional to the amount of money/assets they contribute. The several Feeder Fund LP companies will in turn invest all of this money in the Master Fund, which is where all the different investors get consolidated into one portfolio. Feeder Fund LP is also where Management Company LLC serves as General Partner and physically gets paid for managing the Master Fund. Feeder Fund is technically unnecessary if you don't have many different types of investors that require varying levels of attention (e.g. international investors, etc)

Master Fund LP - owned by all the Feeder Fund LP entities and managed by Management Company LLC who acts as the General Partner. This is where all the assets are physically invested into securities, bought and sold, and all of the other activity you usually think of a hedge fund doing. As assets go in and out, Feeder Fund LP entities will increase or decrease ownership stakes and make payments to the Management Company LLC for performing the service of investing the assets in Master Fund LP.

Simple enough, just sounds scarier than it is.

I hate victims who respect their executioners

4/24/14

Second nice summary of this thread.

I'm talking about liquid. Rich enough to have your own jet. Rich enough not to waste time. Fifty, a hundred million dollars, buddy. A player. Or nothing.

See my Blog & AMA

4/26/14

Helps a lot, thanks

6/10/15

lol, Got it than ever before.

4/23/14

"When you stop striving for perfection, you might as well be dead."

5/2/14

Colourful TV, colourless Life.

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