Advice for tiny UK "HF" please!

[sj8070]

I have been trading a close friends account, along with my own, for around 2 years, charging zero fees in order to build up some track record.

Performance has been good: Avg. ~235bps per month, worst month -423bps, best 899bps. NAV 10k --> ~16k

I now have a number of willing investors (friends and family) and would like to start charging fees (was thinking 0,20) with a view to trading full time in the near future.

Launch NAV would be ~40k.

How is best to structure this legally? Incorporate? Investment club? This is surely not uncommon..

Also any views on charging fees with respect to FSA regulations much appreciated

 

[Ripley]

The number one thing you (even before an entity) want when launching a hedge fund is a catchy name. Some names have the power to open up the wallets themselves.

I used this site to come up with a great name: http://www.hedgefundnamegenerator.com/ [Of course, Black Street Associates is taken.]

 

[just21]

Use interactivebrokers friends and family account. Upto 15 sub accounts, trades distributed evenly from the master account, no need to register with fsa or accept money as all stay in investor name.

 

[rtiger29]

Quote from just21:

Use interactivebrokers friends and family account. Upto 15 sub accounts, trades distributed evenly from the master account, no need to register with fsa or accept money as all stay in investor name.

This might be the easiest way to go about it. Seems way less complicated.

 

[LeeD]

Quote from just21:

Use interactivebrokers friends and family account. Upto 15 sub accounts, trades distributed evenly from the master account, no need to register with fsa or accept money as all stay in investor name.

The OP asked about UK HF. So,the riles applied in the US (such as maximum 15 clients without need for registration) are largely irrelevent... unless the OP plans to actively market in the US.

Quote from sj8070:

How is best to structure this legally? Incorporate? Investment club? This is surely not uncommon..

Also any views on charging fees with respect to FSA regulations much appreciated

Investment clubs are base don the idea that no one gets paid for managing money. The investors who pooled the money are partners and as such they share investment ideas and the management workload.

Once you start charging fees, it's a totally different matter. Even to argue about what stock to buy to an individual (unlike publishing in the press/on the Web) you have to register as an investment advisor - exams and fees involved. This is probably the lowest-threshold entry into the regulated world.

If you want to pool money together as opposed to managing each idividual's account separately (even if the trades are replicated and pooled for execution) the best structure is probably the limited company or limited partnership. In this case I can see 2 solutions to charge correct fee:
1) have different classes of shares where yours will enjoy higher and guaranteed dividend (this will be difficult to set-up robustly when participation of investors changes over time... and would mean all gains are paid as didvidend);
2) put in the paperwork that you as a director have no fixed pay but are paid commission or bonus based on the fees you are going to charge - this will be taxed as "earned" income.

 

[clerk]

You can't take compensation for this in the UK without FSA authorization. Directly, or indirectly. Sorry.

In the UK, there is a barrier for entry into the HF world. You will need enough AUM and your own capital reserves for the FSA to give your business plan a thumbs up.

There is no FSA-light regime like the SEC's ERA regime in the United States.

If there is enough money at stake, look at working at a firm who will supervise you and give you a small cut of the fees. Or move.

 

[Ghost of Cutten]

Quote from just21:

Use interactivebrokers friends and family account. Upto 15 sub accounts, trades distributed evenly from the master account, no need to register with fsa or accept money as all stay in investor name.

And how do you earn any money from this, and stay out of jail? The moment you click buy or sell on another person's account, you are managing their money - without FSA registration you just committed a crime. The moment you charge any fee, without registration and the appropriate license, you just committed a crime. Even simply giving buying or selling recommendations is technically against the law unless you are registered to give investment advice.

 

[Ghost of Cutten]

Quote from LeeD:


If you want to pool money together as opposed to managing each idividual's account separately (even if the trades are replicated and pooled for execution) the best structure is probably the limited company or limited partnership. In this case I can see 2 solutions to charge correct fee:
1) have different classes of shares where yours will enjoy higher and guaranteed dividend (this will be difficult to set-up robustly when participation of investors changes over time... and would mean all gains are paid as didvidend);
2) put in the paperwork that you as a director have no fixed pay but are paid commission or bonus based on the fees you are going to charge - this will be taxed as "earned" income.

This will be probably considered a 'collective investment scheme', which needs to be FSA regulated.

Bottom line is, unless you have about 250k+ to spend on fees, and a lot of ability to handle red tape, you can forget managing money in the UK. Either trade for yourself, or go work at a trading institution until you get rich enough to pay other people to do all the regulatory stuff for you, or emigrate to somewhere with a lighter regulatory burden.

 

[rtiger29]

Quote from Ghost of Cutten:

And how do you earn any money from this, and stay out of jail? The moment you click buy or sell on another person's account, you are managing their money - without FSA registration you just committed a crime. The moment you charge any fee, without registration and the appropriate license, you just committed a crime. Even simply giving buying or selling recommendations is technically against the law unless you are registered to give investment advice.

In the UK, yes, your right. In the US, different story. Its allowed in the US, but i assume you make your statement because OP is in Uk, in that case, maybe he needs to figure something else out, and there have been a couple of suggestions that sound good.

 

[gmst]

Quote from rtiger29:

In the UK, yes, your right. In the US, different story. Its allowed in the US, but i assume you make your statement because OP is in Uk, in that case, maybe he needs to figure something else out, and there have been a couple of suggestions that sound good.

In US also, you can't charge anything from your investors unless you have registered as an RIA. I am sure this applies at least for CA.