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CPO
- Thread starter bballboy8
- Start date
If I start my own CPO, I understand that I can charge clients a performance fee regardless of their accreditation. Are you also able to trade equities within a CPO or is it restricted to just futures and futures derivatives?
I'm not a licensed attorney and you should seek qualified legal advice.
That said, I've run a CPO firm under a 4.7 exemption. I've also had the same entity registered as a CTA, major swaps participant, and investment advisor (SEC) all at once. Needless to say, we traded all of the asset classes out of the same entity.
Likewise, you'd be able to trade equities (or spot FX, swaps, treasuries, anything really) as a CPO firm. Just that depending on the nature of your business, you may well be required to also file with state or federal regulators to register as an ERA, or file Form ADV with the SEC to register as an RIA.
There's obvious advantages to this approach, since the accounting, audit and administration work are consolidated and it becomes cheaper than operating entities separately. Moreover, multi-asset vehicles have appeal to large institutional investors. However the downside may be that certain investors have internal mandates that prevent them from investing in a particular asset class, and if your business is highly conditional on 1-2 of those as major investors, then you might prefer to have actual separate entities trading derivatives and securities rather than allocating the PnL and positions differently across different classes of securities offered by the "CPO" entity.
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I'm not a licensed attorney and you should seek qualified legal advice.
That said, I've run a CPO firm under a 4.7 exemption. I've also had the same entity registered as a CTA, major swaps participant, and investment advisor (SEC) all at once. Needless to say, we traded all of the asset classes out of the same entity.
Likewise, you'd be able to trade equities (or spot FX, swaps, treasuries, anything really) as a CPO firm. Just that depending on the nature of your business, you may well be required to also file with state or federal regulators to register as an ERA, or file Form ADV with the SEC to register as an RIA.
There's obvious advantages to this approach, since the accounting, audit and administration work are consolidated and it becomes cheaper than operating entities separately. Moreover, multi-asset vehicles have appeal to large institutional investors. However the downside may be that certain investors have internal mandates that prevent them from investing in a particular asset class, and if your business is highly conditional on 1-2 of those as major investors, then you might prefer to have actual separate entities trading derivatives and securities rather than allocating the PnL and positions differently across different classes of securities offered by the "CPO" entity.
So what is the difference between a hedge fund and a commodity pool then? Is it just who can invest? I understand that in order to invest in a hedge fund, you must be an accredited investor but you don't need to have this requirement to invest in a commodity pool. Since commodity pools can also trade equities, what would the advantage of a hedge fund over a commodity pool be?
So what is the difference between a hedge fund and a commodity pool then? Is it just who can invest? I understand that in order to invest in a hedge fund, you must be an accredited investor but you don't need to have this requirement to invest in a commodity pool. Since commodity pools can also trade equities, what would the advantage of a hedge fund over a commodity pool be?
It's hard to answer your question because it seems that there's several inaccuracies in your assumptions and contextual knowledge, to the point that your question itself is invalid.
From the perspective of the investment manager, any kind of requirement that requires you to formally register or be classified as a special class of entity is disadvantageous, since that just increases your regulatory exposure and compliance costs. The most advantageous situation is that you trade both securities and derivatives without being considered either! (And indeed, prop firms often do both and have much lesser regulatory burden than both CPOs and 3(c)1/3(c)7 funds, unless they are required to register as BDs.)
There is no formal definition of a "hedge fund" in the CFR. However in practice, the common distinction is that all US-based hedge funds take the 3(c)1 or 3(c)7 exemption to avoid being required to register as an investment company. You don't file a form to apply to take this exemption, you simply limit to your investors to a specific type and number.
Another way to word this is - anyone can invest in a commingled pool that trades equities or trades futures. However, the manager of that pool will usually restrict the offering of securities (to invest in the pool) to only certain qualified participants in order to take advantage of certain exemptions from registration. Purely for the scale of business opportunity, most serious hedge funds will take a 3(c)7 exemption rather than a 3(c)1 exemption, and hence only subscribe qualified purchasers and not accredited investors.
Concurrently, most hedge funds need enough number of investors and AUM to keep the lights on, past the point where the investment manager of the fund is required to file as an ERA or RIA. To the layperson, most hedge funds they know of have sufficiently large AUM that they were required to register as an RIA, so many associate "hedge fund" with "RIA", but they're really independent things. Likewise, going back to your question, it wouldn't make sense to ask "What's the advantage of trading futures as an RIA instead of a 3(c)7 fund?"
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