Quote from fhg386:
The benefit is for the business. If I create a firm and hedge fund the results are the funds results and not the managers. It institutionalizes the performance.
My desire is to build a business. I won't be able to put my personal accounts into Hedge fund performance tables.
There are many types of risk investors will evaluate of which most will be hightened for a start up. The one risk that I can minimize, from an investor's point of view, is performance replication.
IMO, people are a bit too liberal with their advice around here. It makes me wonder if many of them have been through the process of starting a fund.
First, to accomplish what you are trying to do, you don't need an incubator fund. See, the SEC and NFA require past performance to be disclosed in a certain format anyway. A lawyer or accountant is simply following this format, which fortunately is plainly demonstrated online. Once the draft has been completed, it is sent to the proper regulating body for approval. There is often a bit of back and forth, but in the end it is the regulating authority who approves your disclosure documents.
Second, you don't need to prepare disclosure documents until you are ready to start managing for others. This means that you don't need any audits, and you are exempt from registration. It isn't until you are ready to branch out that you'll need to prepare the necessary DDOC and meet the compliance requirements. The only thing you need to do at this point is to form the entity and setup entity's account at your chosen brokerage. Your capital will be the only thing traded and you won't need to provide statements, audits, etc... until later. Even if you use a service like Legal Zoom, it will only cost you about $400 to setup an LLC or LP to start things off. You aren't large enough right now to even consider an off-shore master-feeder fund, or anything that might require greater legal assistance.
All discretionary accounts within the past 5 years must be disclosed via the prescribed format. So I really wouldn't do what was suggested earlier, like starting sub accounts for different strategies and then running with the one that does well. BEFORE you even think about creating a discretionary trading entity you should be extremely confident in your single best strategy. Remember this one important point. DISCRETIONARY ACCOUNTS ARE NOT THE PLACE TO TEST STRATEGIES FOR PROFITABILITY. EVEN IF THEY ARE YOUR OWN PERSONAL CAPITAL. To do this is to pretty much guarantee that you won't be able to raise significant funding for several more years.
Prop accounts are where all strategy development should take place. Never include a strategy under a discretionary account until it is proven and trusted.
Lastly, yes you can include proprietary performance in your DDOC, but it is provided in a completely different section and the fact that it was a prop account is stated very clearly. But understand, whether you create an LLC through Legal Zoom, or use a law firm to create an "incubator fund", the DDOC in the end won't be any different, and the prospective clients will not know the difference. So I ask, why would you want to spend $3000-$5000 on something that doesn't provide any tangible benefit?
