How to establish formal track record?

J

jerryz

What counts as a formal track record for someone starting a hedge fund?

Say you've been trading your own personal account for 3 years or whatever. This is your personal account opened in your name. You did not do the paperwork to establish a formal hedge fund. Now you want to start a hedge fund. Does your personal track record count as the track record for your newly established fund?

I suppose you can show your personal track record, but does your fund legally have a 3 year track record? Will institutional investors (FOFs, etc.) not consider you because technically, you don't have a track record under your fund's name?

Lastly, say you want to start building a track record now but it's too costly to do the legal docs for a formal fund formation. What can you do so that your track record will count when you do establish a formal fund later on?
 
I don't know that there is a formal written rule from any of the governing bodies. There are a number of firms who throw anything out as a record just to look like they've been around for a while. Some note the distinction between their prop account and fund accts, others don't. Institutions will certainly ask about that and much more, as will some individuals.

I think the key is that the account needs to be exclusively running the precise strategy that will be used in the fund, even if it evolves. It's not terribly expensive to start a fund. Some institutions will frown on using prop accounts for records because one can always pick and choose the prop account you want to bring forward. With a registered fund, most governing bodies require that any funds managed by the same person over the last X number of years (maybe 10) have performance disclosed either on the (NFA) DD or the (SEC) ADV Part II. This way, if you had a fund that went bust, it needs to be disclosed. Some institutions feel better about ignoring prop records for this reason.
 
Thanks for the input. When you say it's not too expensive to start a fund, what is the cost that you have in mind? I've heard of places that offer low cost HF formation docs, but I hear different reviews about the quality of the service. I've also heard that institutions will not take your documents seriously unless they are prepared by a well known or brand name firm. I'd be very interested in hearing people's views and experience with this.
 
(Note: This is my own interpretation of what is allowable under CFTC guidelines. I would contact the NFA...they are helpful and polite.)
Your fees will range based upon what services you use (stating the obvious, I know). Registering with the CFTC and NFA as a CTA, CPO, Principal, etc will range from $1-2K. Using legal services for dis docs and auditing your personal acct could range from $2-30K.
As far as using your prop acct as track record, assuming it is an accurate record of the strats you will use, you can include them. You must disclose that it was a prop acct of course, but you can include in docs/performance. However, as mentioned already, some potential clients will not want to see a prop acct track record.

Good luck either way! I look forward to other posts.
 
Best way is to take your records and have an accredited accountant audit it. This will make your track record more official.
 
As far as what is acceptable for showing as a track record, a good standard would probably be the NFA's guidelines for CPO and CTA Disclosure Documents. This can be found on their website (www.nfa.futures.org) under Compliance > Issues for CPOs and CTAs > Disclosure Documents a Guide for CPOs and CTAs.

I am in the process of launching a fund. Costs can be kept low, but I might add that it is easier (in my opinion) with a CPO or CTA than with a hedge fund because:

1. There are many boiler plate CPO/CTA docs online you can use
2. The NFA has to approve your documents which provides you with some level of comfort, even though they disclaim the accuracy of its contents
 
Quote from MYDemaray:

As far as what is acceptable for showing as a track record, a good standard would probably be the NFA's guidelines for CPO and CTA Disclosure Documents. This can be found on their website (www.nfa.futures.org) under Compliance > Issues for CPOs and CTAs > Disclosure Documents a Guide for CPOs and CTAs.

I am in the process of launching a fund. Costs can be kept low, but I might add that it is easier (in my opinion) with a CPO or CTA than with a hedge fund because:

1. There are many boiler plate CPO/CTA docs online you can use
2. The NFA has to approve your documents which provides you with some level of comfort, even though they disclaim the accuracy of its contents
More...
I agree, thats the best way to go
 
One consideration to keep in mind with a HF vs. CTA/CPO structure is regulation. While registering as a CFTC/NFA regulated entity is easier, if you deal in anything regulated as a security you may fall into SEC required registration as an RIA and be subject to ADV filings - or state filings.
 
Open a 10k account under an LLC keep good books and have it audited.

1 years results will get you some seed money if your are any good imo.
 
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