Small Startup HF/PE Structuring
I am new here, so thanks in advance for any help. I have done plenty of research, between LPs with LLCs as the GP, managing client accounts and being an IA. 3c1 and 3c7 funds, Private offerings, needing accredited investors, licensing, etc. I have also browsed through about as many topics in these forums as I can handle, so I apologize if this question has already been answered. This site seems like one of the best resources online so kudos to all of you.
I'm trying to figure out the simplest way to manage assets from multiple investors in primarily stock and options investments. I have a strategy that requires a moderate amount of trading and would like to have all of the funds in one account. I also need a structure that does not allow clients to see what exactly they are invested in. I have backtested this strategy over decades and have been testing it in live markets in live markets for less than a year. The account I have traded it in also has side investments, so it is not ideal for showing any track record to other investors. My strategy is fairly simple so I believe it could be backengineered if a client wanted to and I want to avoid that possibility. I have a total of approximately 2M AUM from less than 10 clients (not all are accredited investors), and many of them have expressed interest in making much larger investments in the future. I know 2M is not much but I would like to set up a fund now to start a track record for future use.
I have looked into InteractiveBrokers accounts that allow investing across multiple accounts in the same transaction, but they would be able to see the investments. I believe I would then also have to set up an IA and become a registered rep with a series 65 to take management fees.
I have also looked at setting up a LP with a LLC that I own as the GP. This structure seems like it would have problems with life and entry/exit of clients. I would like a structure that allows for entry/exit whenever the client desires. This structure seems ideal for business aquisitions and RE deals, but I wondered if it would be one of the simplest to set up for 2 years. I also wondered if the LLC that is the GP is required to be licensed.
What structure is best for a 1-5 year investment with multiple investors? Will they be able to add to/liquidate investments at any time?
Needs to not be visible to investors, but I will include backtested chart results, alpha scores, etc.
Do I need a license? Series 65 and set up an LLC as an IA?
Available to accredited investors only? It seems as though most are available to up to 10 non-accredited investors within a 12 month period.
I have a lot more questions and info I could add, but perhaps this is enough to get pointed in the right direction. Thanks.
Any help on this topic would be greatly appreciated. Possibly someone could just answer questions for an LLC being the GP of a LP. When I am the sole owner of the LLC, do I need a licence to only take management fees from 1 client, the LP?
I have no clue but a quick search found this.
http://www.turnkeyhedgefunds.com/
A lot of people starting a business worry more about other people stealing their ideas than they do getting the business off the ground. This is backwards and frankly kind of ridiculous. No one who trusts you enough to be part of your first $2mm with no track record is likely to go to the trouble of reverse-engineering and then implementing your investment strategy. The value is in the execution, not the idea anyway. They are presumably hiring you in large part because they want someone to manage investments for them. Besides, you can always have a line in your IAA prohibiting replication if you're really concerned about competition from your initial client base.
With that I would strongly consider the RIA/SMA approach for cost, liquidity, and access reasons. You'd have to take the test and register, but you could accept anyone as a client. If you go the GP/LP route you can have a limited number of unaccredited investors, but you won't be able to advertise. In principle you can offer liquidity at any interval, but given the need for third-party administration and NAV calculations it is generally impractical to allow redemptions for LPs more often than quarterly, maybe monthly at best. Expect to pay more and if you're successful you'll end up having to register anyway.
Thanks for the feedback,
Cmoss- I have already looked into some securities attorneys for help but I thought this board may have better opinions.
tempaccount- I understand your thinking but I would prefer to keep the idea safe. I have gone through that same thinking in other businesses and believe that certain ventures warrant some skepticism and need for protection. With that said, I would like to know more about what you think the benefits of each are.
My first concern with using the RIA structure, and why I looked into a fund structure, was the broker fees. My strategy uses a fair amount of trading and every broker that allows master accounts to trade for multiple accounts still wants to take the full amount of fees on each account. Do you know of any brokers that don't do this?
As far as liquidity, sorry for being imprecise with my past statement. I was only expecting to allow redemptions quarterly so I'm not too worried about the fund structure for this. I just don't want to form a fund where investors are locked in for years.
Getting registered isn't a problem, I just need to know if its necessary or not.
Advertising isn't a major concern because I only plan on getting clients through word of mouth and my current connections, and frankly I don't think I want to reach out to random clients at this time or in the near future.
What are your thoughts on cost? I definitely agree that a fund is more expensive initially. I believe I can set up a fund for around 10k if i do most of the paperwork myself, and an IA for under 5k.
If you manage SMAs, you need to register. If you only manage partnership, for the most part you won't need to unless it reaches certain size thresholds. I'm not too familiar with ERA requirements offhand but you should check those too. As for investors being locked in, it's within your control however you structure it.
Brokerage fees shouldn't be an issue at any institutional brokerage, where trading costs are per share (not a flat fee per trade). At IB for example you pay commissions on each trade at the master account level that are allocated proportionally to clients. So if you trade 1000 shares allocated to 10 equally sized accounts, you might pay a commission of say $4.00, $0.40 per account. I don't think IB can blind accounts though, and most larger platforms won't be able to take small accounts under $1mm. Firms like Schwab that cater to RIAs may have the commission issue you describe because they tend to charge per trade. Not sure.
You're in the right ballpark for just setting up the legal entities, although even if you do the document preparation yourself I would strongly recommend at least consulting with an attorney. A partnership will typically have five-figure ongoing annual administration/custody, legal, tax preparation, and audit costs that an RIA would not, especially if it does not take custody.
http://www.jonesday.com/exempt_reporting_advisers/
my firm runs SMAs through IB--no registration. Yes, clients can see the transactions, but reverse engineering isn't a concern for us. At the end of the day, if an investor wants to know what's going on, you should be ready to tell them.
PM me if you'd like to chat re specifics
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