Thanks!
Question to both Aaron and heech,
What about FCM's which one is best for CPO or CTA as far as platforms, reporting, fees, and 'marketing', etc, etc?
CTA Startup
- Thread starter BGB
- Start date
Thanks!
Question to both Aaron and heech,
What about FCM's which one is best for CPO or CTA as far as platforms, reporting, fees, and 'marketing', etc, etc?
For me, after bouncing through a few different firms, my biggest priority has turned to "customer service" above the rest. Because frankly, customer service should be able to make the rest work out for you. (This all assumes you're doing decent size; there are no philanthropists out there.)
FCMs/brokers are mostly "commodities" themselves, these days... mostly interchangeable.
In terms of platforms... if you're tied to one, I'd suggest you pick the platform and then choose the broker. You'll have any number of choices in any direction.
In terms of fees... if fees are your primary consideration, I'd look at either IB or Advantage Futures. Others might be able to match them, but probably not do much better.
In terms of reporting... I'd say, ask them for a sample report. My fund admin is able to put in the work to integrate with just about anyone.
In terms of marketing.. no idea. That's a part of the puzzle I haven't figured out. Aaron will probably have much more useful input.
Aaron,
Sure, happy to share what I've learned. This seems obvious, but just to repeat what so many others put in their emails: none of this is tax/legal advice, talk to a real professional.
Keep in mind many firms have some sort of startup package. Keep in mind, also, that your fees are technically paid from the fund, and not out of pocket.
Attorney fees were $17500, although it probably could've been $3-5k less if I had pressed. These fees can be prorated from the fund over 5 years.
For audit, I have similar quotes from both RSM McGladrey and Rothstein Kass. It was ~$20k for audit alone, and $25k for audit + tax for a single starter fund. Once your fund gets 8 digits or larger in size, fees will probably be some % of AUM. The audit only happens at the end of the first year. If you launch your fund at the beginning of the year and shut it down before the end of the year, you don't incur any fees at all. That was how I saw things with my fund... if the first year's results paid off and I was gaining investor interest, I'd keep going. If after 12 months I wasn't getting anywhere, I'd just close it down and keep prop trading.
For fund admin, I was quoted from $750/mo to $2000/mo for starter packages. I went with a firm that's charging me $1200/mo, but I simply "liked" them more. They had a nice cash disbursement/wire transfer setup through JPMorganChase, nice reporting functions, etc, etc. They also allowed me to scale up/down the type of services I wanted from them, and order on an ala carte basis.
If anyone wants a recommendation, feel free to PM me. I'd be happy to pass on info for any of these providers.
So, in terms of fixed costs... I'm talking about recurring costs of ~$3-4k a month. It's not cheap, and it's certainly not for everyone.
If you have $1mm AUM, you could probably cover those costs with fees, but you'd probably have to live off of savings in the mean time. But if you expect you have $2mm AUM by the end of your first year, and if you legitimately believe you have a real edge that may attract large dollars... well, that's why I decided to try investing in first class providers. I don't have enough data points yet to know whether it's the right decision.
I'm sure Aaron knows the answer to this, I don't.
As a CPO, for now at least, carried interest is taxed depending on the characteristic of the profits... so while trading commodities/futures, that means 60/40 long-term cap gains. But there are various bills in congress that will get rid of this exemption, and I'll be back to paying ordinary income.
While it sounds like a simple question, that is a big topic. There are several permutations. You can have trading profits on your own money, trading profits on investor money that go to the investor, trading profits on investor money paid to your management company (performance fees), there are also management fees and some CTA's get commission-based income. Then there are also management, performance fees, and trading profits in commodity pools. And your management company could be a sole proprietorship, LLC, LP, or Subchapter S corp. And the management company could pay you personally a dividend, salary, or you could leave the money in the company, or LLC's and LP's are pass-through entities for tax purposes.
So if you want an accurate answer you have to be careful to specify the question and the business setup. But maybe you were asking about trading profits on your own personal futures trading in your own personal account? That isn't affected by your status as an associated person of a registered CTA. That will still be Section 1256 Contracts and Straddles income and gets the 60/40 tax treatment as Heech said.
Suppose the management company is a LLC and taxed as partnership, and no salary for the manager,
how will the following fee be taxed in a pool under a LP or LLC?
1. management fee (assume 2%)
2. performance fee from clients contribution (assume 20%)
3. performance fee of my own contribution in the pool
4. remaining profit is distributed as 60/40 capital gain (as suggested in your previous message)
how will the following fee be taxed in a pool under a LP or LLC?
1. management fee (assume 2%)
2. performance fee from clients contribution (assume 20%)
3. performance fee of my own contribution in the pool
4. remaining profit is distributed as 60/40 capital gain (as suggested in your previous message)
I would have the management fee flow through to the tax returns of the owner(s) of the management company as ordinary income. It'll be on their Schedule E.
If your pool partnership agreement indicates that the performance fee is an allocation of the capital gains (and it should!), then it is appropriate for the performance fee from both your clients and your own investment to get 60/40 tax treatment through Form 6781 and your Schedule D.
And then, yes, your clients will get the 60/40 capital gain on the rest of their gains. You'll send them a K-1 statement which will instruct your client where to put the number on their Form 6781.
Hope this helps!
Aaron Schindler