How do I trade OPM legally? Excellent return, need advice

[ScalperJoe]

Hi all,

So I have a lot of offers from friends and family to invest for them. I know this is usually ill-advised, but I have briefed them on the risk (that they may lose it all), and so only people with money to spare are interested. For 5 years of backtest data I averaged a 29% return per year, and this year so far I am up 56%. I also traded most of last year and ended at 81% return. Basically I want to start a fund/account to trade roughly 200k in investments legally with minimal startup costs if possible. Note, these people are not accredited investors. Is an LLC the best way, or a fully structured hedge fund? Does anyone have any suggestions on the way to do this? I understand it is risky, but I would appreciate advice on the process for this!

Starting a hedge fund is more complicated than starting your own advisory business. Check with your state regulator, and most likely you will need a Series 65 license and set up an LLC.

Then you can set up an advisory trading account where you have discretion over all trades and charge a fee to manage the accounts. You also can charge a performance fee, but only to accredited investors. Since you mentioned the investors are not accredited, then you can only charge the advisory fee, usually 1% to 2%.

Again, check with the state regulator on all the rules. IB "friends and family" is another route as well, however depending on the state, you still may require the Series 65 license. That particular license does not require a sponsoring broker/dealer, unlike the Series 7.

 

[xandman]

It shouldn't be that big of an issue if your sticking to stocks. The pro data value bundle is only $10 bucks, but you may have specific needs that require unbundled rates. I will post the evaluation spreadsheet of the data rates tomorrow. But, you can look this up at ibkr yourself.

LLC can be used for liability or tax purposes. But, you better make sure that all the additional costs won't make your higher cost structure impractical. If you open a friends and family account with ibkr under an LLC, you will be charged pro rates. Additionally, you may have reporting and compliance costs specific to your State if you are a registered investment professional. Take a gander at RIA in a box.

Different States, different products, different costs. All need to be considered. Plus the fact that people will curse you for decades if your fund tanks during a recession. I realize your only 25, but do you remember how the last recession killed your lemonade stand?

 

[rmorse]

Hi all,

So I have a lot of offers from friends and family to invest for them. I know this is usually ill-advised, but I have briefed them on the risk (that they may lose it all), and so only people with money to spare are interested. For 5 years of backtest data I averaged a 29% return per year, and this year so far I am up 56%. I also traded most of last year and ended at 81% return. Basically I want to start a fund/account to trade roughly 200k in investments legally with minimal startup costs if possible. Note, these people are not accredited investors. Is an LLC the best way, or a fully structured hedge fund? Does anyone have any suggestions on the way to do this? I understand it is risky, but I would appreciate advice on the process for this!

I sent you a PM. Happy to talk to you directly and discuss this.

 

[xandman]

Bob, you are a gentleman and a saint.

Anyway, here is the data rates from the IBKR website. The Lite Value Bundle highlighted in green may be sufficient, but verify whether you don't need some unbundled data.

 

[MrN]

It's just stocks no futures. What agencies?

Contact your state securities regulator. And no, I am not going to do the google search for you.

 

[rmorse]

MrN and ScalperJoe are correct. If you are going to charge a fee, it is your responsibility to check to see if you have to register as an RIA. Just because a broker allows you the ability to trade OPM does not mean you don't have a regulatory requirement.

 

[ro ana]

Thank you all for the replies! I really appreciate it!

 

[Scataphagos]

Hi all,

So I have a lot of offers from friends and family to invest for them. I know this is usually ill-advised, but I have briefed them on the risk (that they may lose it all), and so only people with money to spare are interested. For 5 years of backtest data I averaged a 29% return per year, and this year so far I am up 56%. I also traded most of last year and ended at 81% return. Basically I want to start a fund/account to trade roughly 200k in investments legally with minimal startup costs if possible. Note, these people are not accredited investors. Is an LLC the best way, or a fully structured hedge fund? Does anyone have any suggestions on the way to do this? I understand it is risky, but I would appreciate advice on the process for this!

If you're going to trade OPM... the regulatory agencies have requirements... SEC, CFTC, NFA. All info available online. There are exceptions for "small amount of $$, and small number of clients"... those are for "starters" but won't get you anywhere financially.... other than potentially developing a "track record with small money". That's better than no track record at all, but "small money anything" isn't taken seriously in the real world of OPM management.

Hey, but you gotta start "somewhere". I know, did it myself years back... among LOTS of disbelief. If you're a "no-name" trying to make a reputation without name-brand support/endorsement, you've got an up-hill battle. Difficult, but not impossible.

Most important... (1) trade well, (2) keep audit-able records. If successful "enough" over a "long enough time frame", the marketplace will eventually find you.

 

[ro ana]

If you're going to trade OPM... the regulatory agencies have requirements... SEC, CFTC, NFA. All info available online. There are exceptions for "small amount of $$, and small number of clients"... those are for "starters" but won't get you anywhere financially.... other than potentially developing a "track record with small money". That's better than no track record at all, but "small money anything" isn't taken seriously in the real world of OPM management.

Hey, but you gotta start "somewhere". I know, did it myself years back... among LOTS of disbelief. If you're a "no-name" trying to make a reputation without name-brand support/endorsement, you've got an up-hill battle. Difficult, but not impossible.

Most important... (1) trade well, (2) keep audit-able records. If successful "enough" over a "long enough time frame", the marketplace will eventually find you.

Thanks for the reply! That is essentially what I am doing. Trying to start with a small amount to try and get a good base and record. Any ideas what the law surrounding this small management are?

 

[Scataphagos]

Thanks for the reply! That is essentially what I am doing. Trying to start with a small amount to try and get a good base and record. Any ideas what the law surrounding this small management are?

It's been a while since I was in that marketplace, so some things likely have changed. Best to check with the regulators on their requirements. Compliance is the annoyance. Performance is the difficulty.

One thing for sure.... reputation is everything for you. Don't fudge. Be 100% honest and truthful at all times.... even when you screw up. If you don't, it will eventually come back to haunt you.