My account value reaches $600,000 for the first time; launching incubator hedge fund

[lazar206]

Quote from Free Thinker:

you were lucky to start at the beginning of the greatest bull in history. the old saying is dont confuse brains for a bull market. just asking. dont know. do you think you have the skills to play anything but an up market?

I guess in the next 3 years will have a chance to see how my account is handling a downturn market. From my point of view, if the market goes into a panic mode, that's the time that you can find the greatest values if you can meet the following conditions.
1. You keep buying on a consistent monthly basis.
2. You are very well diversified.
3. You are a buy and hold investor.
4. Have enough liquidity not to get a margin call.

I have used that by the last bear market (Dec 2008- March 2009) and it worked out extremely well…

 

[Free Thinker]

Quote from lazar206:

I guess in the next 3 years will have a chance to see how my account is handling a downturn market. From my point of view, if the market goes into a panic mode, that's the time that you can find the greatest values if you can meet the following conditions.
1. You keep buying on a consistent monthly basis.
2. You are very well diversified.
3. You are a buy and hold investor.
4. Have enough liquidity not to get a margin call.

I have used that by the last bear market (Dec 2008- March 2009) and it worked out extremely well…

buy and hold has been a proven failure in the fund industry. it especially will not work running a fund with multiple investors. first you will not be able to
" keep buying on a consistent monthly basis" if you are fully invested going into a downturn. second, your fund customers will want out at the worst possible time causing you to have to sell at the worst possible time to meet redemptions.
you might want to consider where you would be had you started out fully invested one year earlier. just a few things to think about as a future fund manager.

 

[the1]

If you have investors you can start an incubator fund for much less than this. When I started mine I paid a mere fraction of the costs you are mentioning. The audit was the most expensive part but even that can be completed for less than 10K. There is a lot of work you can do to make the auditors job much easier.

Quote from Cache Landing:

Incubator fund will cost about $3,000 to setup and doesn't carry any of the maintenance costs.

Certainly, your $100K first year cost statement is a slight exaggeration though. More in the $50K range is realistic.

-$25K fund setup
-$10K audit
-$5K tax prep
-$10K administrative

But your point is well taken. With only 60% annual returns, he'll need 500K AUM just to break even after costs, running a one-man operation. A fair stress test would take market correlation into account and after that he might discover that he's really looking at $2MM minimum to launch the full blown fund.

 

[LeeD]

Quote from the1:

If you have investors you can start an incubator fund for much less than this. When I started mine I paid a mere fraction of the costs you are mentioning. The audit was the most expensive part but even that can be completed for less than 10K. There is a lot of work you can do to make the auditors job much easier.

I understand the main downside of saving on the legal side of document preparation is and shoddy work on thi sside will be a major red flag for larger-size investors in the future.

The cost of fund setup is one of the reasons to run "incubator". With the manager himself being the only investor there is no need for provisions regarding withdrawing funds or charging fees.

 

[jem]

Quote from heech:

First of all, I have on idea what "you guys were". Selling courses is not under the purview of the SEC, while selling interests in a private partnership certainly is.

The SEC/FINRA/CFTC websites have a long record, on their website, showing enforcement action against those who do not fully conform to legal requirements on disclosure, general solicitation, etc. It doesn't matter if you were being truthful or not.

Here's one example:

http://www.sec.gov/litigation/admin/33-8585.pdf

At all relevant times, GKA and KPP marketed their investment advisory services through radio programs, investment seminars, and the Internet. While the interests in Fund I and Fund II were being offered to investors, GKA and KPP principals talked about these hedge funds, including the reason for starting the Funds, the investment strategies, and minimum investment amounts, during at least one radio program. During the same offering period, the hedge funds were also discussed by GKA and KPP principals during one or more investment seminars. In addition, performance figures for the hedge funds, fund strategy, and contact information were posted for a brief period in the fall of 2002 on the advisers’ shared website, which was accessible
to the general public. Accordingly, as a result of these marketing activities, the offerings of the hedge funds included a general solicitation.

No allegation they violated any rule except general solicitation for securities not registered with the SEC. As far as why these laws exist... 70 years of history prove they serve a critical purpose in protecting investors.

well now I can see what you are concerned about.
general solicitation is a different animal with rules to be navigated.

I did not see and incubator hedge fund worrying about that until it became a big hedge fund and tried to bring in random clients. But, I can see your point as well.

 

[the1]

There is a way to get your hands on a high quality set of Private Placement Memorandums, Operating Agreements, and Subscription Agreements. You just have to know where to look.

Depending on the instruments traded, taxes for a hedge fund aren't really that hard. Any accounting firm that quotes you 5k to do the return should be fired. The lowest quote I received was $1,500 and I didn't even want to pay that so I rolled up my sleeves and began studying LP taxation and filed the returns myself. The most important part is to have accurate investor allocation records.

Quote from LeeD:

I understand the main downside of saving on the legal side of document preparation is and shoddy work on thi sside will be a major red flag for larger-size investors in the future.

The cost of fund setup is one of the reasons to run "incubator". With the manager himself being the only investor there is no need for provisions regarding withdrawing funds or charging fees.

 

[the1]

Yeah, advertising is a big no-no. The best way to attract capital is through your broker. I know a guy at Infinity Futures who can put a hedge fund manager in touch with a guy who raises capital for hedge funds for a living. Naturally, that comes with a price.

Another thing you can try is joining www.hedgefund.net. You gotta get creative to get around the advertising angle. Once you have a few investors word of mouth becomes a pretty powerful tool.

Quote from heech:

First of all, I have on idea what "you guys were". Selling courses is not under the purview of the SEC, while selling interests in a private partnership certainly is.

The SEC/FINRA/CFTC websites have a long record, on their website, showing enforcement action against those who do not fully conform to legal requirements on disclosure, general solicitation, etc. It doesn't matter if you were being truthful or not.

Here's one example:

http://www.sec.gov/litigation/admin/33-8585.pdf

At all relevant times, GKA and KPP marketed their investment advisory services through radio programs, investment seminars, and the Internet. While the interests in Fund I and Fund II were being offered to investors, GKA and KPP principals talked about these hedge funds, including the reason for starting the Funds, the investment strategies, and minimum investment amounts, during at least one radio program. During the same offering period, the hedge funds were also discussed by GKA and KPP principals during one or more investment seminars. In addition, performance figures for the hedge funds, fund strategy, and contact information were posted for a brief period in the fall of 2002 on the advisers’ shared website, which was accessible
to the general public. Accordingly, as a result of these marketing activities, the offerings of the hedge funds included a general solicitation.

No allegation they violated any rule except general solicitation for securities not registered with the SEC. As far as why these laws exist... 70 years of history prove they serve a critical purpose in protecting investors.

 

[Rodney King]

Quote from the1:

lowest quote I received was $1,500 and I didn't even want to pay that so I rolled up my sleeves

Sure, and you can cut your own lawn and save $50. But if you're running, or hoping to run, a hedgefund, your value-add is your research and trading -- that's where your time and energy need to go.

 

[the1]

When you're first starting up you need to save every penny you can. I worked on the taxes after hours and on the weekends. It didn't interfere with my trading and as a result I learned a great deal about taxation, which has grown into a very valuable skill.

Quote from Rodney King:

Sure, and you can cut your own lawn and save $50. But if you're running, or hoping to run, a hedgefund, your value-add is your research and trading -- that's where your time and energy need to go.

 

[LeeD]

Quote from Rodney King:

Sure, and you can cut your own lawn and save $50.

Some find gardening a recreational activity.