Setting up a hedge fund without setting up a hedge fund
Hi guys, I have being managing my family's money for the last 5 years with consistent profitability. I am currently looking to invest for some friends but not as a money manager but rather simply look after particular positions for them. I am not a trader but employ a buy and hold approach. I have less than 15 investors and I am wondering if I need to be qualified in any legal way to do this. Cheers
How is this a hedge fund?
You should be fine. Most states don't require registration when you have fewer than 15 investors.
without creating some sort of entity, they'd basically just have to give you their usernames & passwords so you could trade their accounts. if you create an entity, legal stuff is involved (licenses, taxes, etc.). if you just log into their accounts for them and you end up sucking, they could take you to court for fraud if things go poorly. I know you think they're your friends but I'm being completely serious when I say money changes relationships.
in my opinion, if you are gifted at managing money, you should not do it for zero compensation and lots of liability, you should enter a legitimate business, get paid, and have controls on liability. there are tons of people who have done well for themselves but that does not necessarily qualify them to give advice to others. if I were you, I would not do this.
of course, if you're just the stock "guru" of your family and you talk about investing over Thanksgiving dinner or something, there's nothing illegal about that, but just realize it'd be akin to if someone were to say to me "hey brofessor, you're pretty good at golf, got any tips?" and I'd say "yeah, you gotta play muscle back irons, only way to go." or if I'm a doctor and somebody goes "man, brofessor, I'm trying to get healthy like you, what should I do?" and I'd say "3-2-1 diet, works wonders for me, and it worked for Christian Bale too!"
I hope you're getting the point that without understanding someone's circumstances, you are in no position to give valuable advice, you're simply giving recommendations in a vacuum (which is one of the reasons I shy away from giving "stock tips" to family & friends).
You can run separately managed accounts through a friends and family platform on interactive brokers. It has a ncie sweep function, etc, so that you can trade once for all 15 funds, and then have the positions auto allocated pro rata to the accounts.
However, if you promote your friends'/family's capital in any way, you are potentially going to register as an investment adviser with your state, even at 15 investors. In a lot of states, the rules and exemptions became a lot stricter in the last couple of years, such that in some states you can't manage $1 without registering. You can find the local laws for your state at the state department website.
@"thebrofessor" spot on with his comments. Beware of the risk involved with this: legally, financially and with regard to relationships. Are you looking to set up a true fund where you commingle monies and have full discretion or are you looking to give advice to them in their portfolio (illegal without licensing)?
If, and that's a big IF, you've been investing with some sophistication and want to set up your own shop, talk to your lawyer and you can find some consultants out there who can answer questions and help you set up whatever regulatory structure you need. I know one is ACA something or other. I don't know and/or forget the specific rules but you may be able to get away with being an RIA rather than entering the BD world.
Hi guys, thanks for your comments. What I am currently doing is simply getting everyone to pool their money into my account. Is this legal? The amount is small but sufficient enough to cover my living expenses, I charge a performance fee. The legal side of things can get very complicated right? I mean, I have to pay taxes on capital gains and when I transfer the money to my investors when they cash out do they have to pay taxes again? I know there is a gift rule but when I asked the tax office they said you are ok as long as you have less than 20m under management? I am not giving investment advice to anyone. Btw, I am based in Australia, so the rules may be different
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