David Einhorn of greenlight capital started his hedge fund with only $1 million.
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My account value reaches $600,000 for the first time; launching incubator hedge fund
- Thread starter lazar206
- Start date
David Einhorn of greenlight capital started his hedge fund with only $1 million.
Quote from the1:
If you wish, you don't have to start an incubator. If your personal returns are good investors will probably accept them. When I started my HF I used my personal returns to demonstrate profitability. All you need is one investor to start the partnership. I started out with 13 investors and grew from there. You can go full-fledged from the get-go.
A couple things you need to aware of. If you are an exempt small pool fund you are exempt from many of the NFA's regulations. Once you go over the 400k/15 people you are no longer exempt. When that happens you can't charge a non-qualified investor a performance fee. You can charge them the 2% management fee but not the 20% and you can only accept up to 35 of those type of investors. The NFA allows you to take on a handful of non-Q's but they make damn sure you won't want to. Then comes the challenge of finding Q investors. Your broker can help you with this....for a fee, and not a cheap one.
Someone should point out that while the above statements are true, there is large risk in starting an HF using personal performance. If you end up in court, it has basically been held that promoting an organized entity with personal historic returns is fraudulent and misleading. You are almost certain to lose. That is why HFs go to the trouble of getting together a track record as a legal entity, as well as all the due process documentation. It is through these that they are protected in the case that the fund loses money and a disgruntled investor comes after them.
I don't know what your background is in making these statements, but in my opinion, you're grossly exaggerating the risks.Quote from Epic:
Someone should point out that while the above statements are true, there is large risk in starting an HF using personal performance. If you end up in court, it has basically been held that promoting an organized entity with personal historic returns is fraudulent and misleading. You are almost certain to lose. That is why HFs go to the trouble of getting together a track record as a legal entity, as well as all the due process documentation. It is through these that they are protected in the case that the fund loses money and a disgruntled investor comes after them.
For example, in the futures world... the NFA has clearly documented rules for marketing historical (personal or not) performance numbers, or even *hypothetical* (that's right, completely fictional) performance numbers. The use of personal performance is not, by any stretch of the imagination, equivalent to "fraudulent" action that implies you are almost certain to lose. I use prop trading numbers in my own marketing material, and I've seen the same in marketing material I get from numerous other funds that I invest in.
Fraud is not determined by the nature of your trading account, but your intent and actual action. If you are consistently trading a strategy, if you're not misleading investors as to your actual performance in the strategy they're investing in, if you have the proper risk disclosures, and if you clearly disclose which performance numbers are based on prop trading... you are on solid legal ground.
As far as trading results from actual fund vehicle versus other numbers... none of the investors (institutional and retail) I've spoken to really care. They'll obviously dig in deeper as of their due dil process, and probably weigh your fund vehicle performance more seriously since (if you have outside investors) it must be backed up by annual audit. But there's absolutely no legal limitation of any kind that they disregard your earlier numbers just because they happen to come from prop trading performance.
In fact, that's one of the biggest misconceptions I've seen on this board... and one I also shared early in the process. I was very concerned about doing an "audit" of my prop numbers before launching the fund vehicle. In hindsight... at most, you can consider finding a CPA to issue a statement of opinion that they've seen your brokerage statements, and validated your performance numbers on that basis alone. But really: investors won't care more than 6-12 months down the line. Your actual fund performance will speak for itself very, very soon.
Quote from heech:
I don't know what your background is in making these statements, but in my opinion, you're grossly exaggerating the risks.
For example, in the futures world... the NFA has clearly documented rules for marketing historical (personal or not) performance numbers, or even *hypothetical* (that's right, completely fictional) performance numbers. The use of personal performance is not, by any stretch of the imagination, equivalent to "fraudulent" action that implies you are almost certain to lose. I use prop trading numbers in my own marketing material, and I've seen the same in marketing material I get from numerous other funds that I invest in.
Fraud is not determined by the nature of your trading account, but your intent and actual action. If you are consistently trading a strategy, if you're not misleading investors as to your actual performance in the strategy they're investing in, if you have the proper risk disclosures, and if you clearly disclose which performance numbers are based on prop trading... you are on solid legal ground.
As far as trading results from actual fund vehicle versus other numbers... none of the investors (institutional and retail) I've spoken to really care. They'll obviously dig in deeper as of their due dil process, and probably weigh your fund vehicle performance more seriously since (if you have outside investors) it must be backed up by annual audit. But there's absolutely no legal limitation of any kind that they disregard your earlier numbers just because they happen to come from prop trading performance.
In fact, that's one of the biggest misconceptions I've seen on this board... and one I also shared early in the process. I was very concerned about doing an "audit" of my prop numbers before launching the fund vehicle. In hindsight... at most, you can consider finding a CPA to issue a statement of opinion that they've seen your brokerage statements, and validated your performance numbers on that basis alone. But really: investors won't care more than 6-12 months down the line. Your actual fund performance will speak for itself very, very soon.
You are talking a completely different issue than I am. You seem to be suggesting that investors don't care whether it is personal performance or fund performance. I completely agree. They don't care at all, until you lose money. Then their lawyers care, and the courts really care.
"Although prior experience in the markets is very valuable in many ways to a hedge fund manager, one thing it usually cannot provide are hard figures that can be presented to potential investors. Securities laws make it very difficult to use a managerâs prior performance figures to promote a new fund.
The problem with advertising prior performance is the fund manager must show that it is truly representative of what an investor could reasonably expect from the fund. Quite simply, the manager must demonstrate that prior apples are equivalent to present oranges. This is not easy. Trading one's own personal account or trading as part of a team at a large hedge fund are significantly different from trading in a startup hedge fund.
Creating a prior performance record is difficult and costly. Prior performance records must be audited for accuracy in accordance with GAAP (Generally Accepted Accounting Principles) and verified according to the standards established by the Chartered Financial Analyst Institute (AIMR-PPS and GIPS). The cost of hiring a specialized firm to perform verifications according to CFA Institute standards is quite high. An even greater obstacle, however, is that attorneys are very reluctant to allow the figures to be used in offering documents. Even if you pay accountants to verify that your figures conform to GAAP and AIMR-PPS / GIPS standards, most attorneys still will not include these prior performance records in offering documents because it exposes them to potential litigation from disgruntled investors.
If you have a great prior record and you plan to use the same trading program and environment in your new fund, it may well be worth the effort and cost to pursue this option. You will have to document that your prior trading strategies and working environment are very similar to your future fund trading strategy and environment. In the majority of cases, however, prior performance simply is not representative. And when it is, it is still quite possible that the potential benefits of verifying prior performance do not justify the associated trouble, expense and potential legal exposure."
~Robert Green.
Just sayin'.......
I'm making both statements: 1) investors don't care, and 2) you're legally okay (within the context of going from prop trading of a strategy to the same strategy in a fund vehicle).
Robert Green, I think, is being self-serving here... especially when he suggests an audit. It's absolutely not necessary. And again, within the NFA context... not only "can" you, you *have* to document all of your historical trading performance.
And even within the SEC context, again within the specific context of using the same strategy... absolutely, you're on solid ground using your prop trading results... as long as they're clearly documented as such. It is NOT fraudulent.
Robert Green, I think, is being self-serving here... especially when he suggests an audit. It's absolutely not necessary. And again, within the NFA context... not only "can" you, you *have* to document all of your historical trading performance.
And even within the SEC context, again within the specific context of using the same strategy... absolutely, you're on solid ground using your prop trading results... as long as they're clearly documented as such. It is NOT fraudulent.
Quote from heech:
I'm making both statements: 1) investors don't care, and 2) you're legally okay (within the context of going from prop trading of a strategy to the same strategy in a fund vehicle).
Robert Green, I think, is being self-serving here... especially when he suggests an audit. It's absolutely not necessary. And again, within the NFA context... not only "can" you, you *have* to document all of your historical trading performance.
And even within the SEC context, again within the specific context of using the same strategy... absolutely, you're on solid ground using your prop trading results... as long as they're clearly documented as such. It is NOT fraudulent.
Actually, if you read the article, he is suggesting that you NOT go the direction of getting the audits.
Maybe fraud is the wrong term. Misrepresentation might be better, and there have been court cases based on this. It is very easy for the prosecution to get professional experts to support the claim that trading a personal or simulated account, and trading a hedge fund account are very different. Indeed, a quick search on this site alone will pull up hundreds of statements to that effect.
And as a blanket statement, courts right now are tending to side with the disgruntled investors, given recent industry developments. Why would anyone want to open themselves up to the potential litigation?
{edit} I just realized that you included the disclaimer of progressing from prop to fund, and using prop record. That would likely be a bit easier to defend. I was talking about trading a personal account.
Quote from heech:
And again, within the NFA context... not only "can" you, you *have* to document all of your historical trading performance.
AFAIK, if you start the fund structure from day one and don't intend to use prior personal performance to market it, then such a disclosure of all prior trading history isn't required.
Congratulations lazar 206! Its not uncommon for traders to get excited when they reach a milestone like that and then they go make a stupid trade and lose half of their earnings! Keep up the good work and good luck with the hedge fund. I'm sure a prudent trader such as yourself has a bright future ahead of him.
I'm usually not this opinionated on this site... but seriously: you're making stuff up. NONE of this is true... I cared enough about this latest claim to actually poll my securities attorney on the question, and she laughed.Quote from Epic:
Actually, if you read the article, he is suggesting that you NOT go the direction of getting the audits.
Maybe fraud is the wrong term. Misrepresentation might be better, and there have been court cases based on this. It is very easy for the prosecution to get professional experts to support the claim that trading a personal or simulated account, and trading a hedge fund account are very different. Indeed, a quick search on this site alone will pull up hundreds of statements to that effect.
And as a blanket statement, courts right now are tending to side with the disgruntled investors, given recent industry developments. Why would anyone want to open themselves up to the potential litigation?
I challenge you to find cases where fund managers are being prosecuted (criminally!?!?) simply for using simulated/personal trading account records in marketing material. Or testimony from professional experts supporting the claim that trading a personal/simulated account is different from trading a hedge fund account, to the point where it is de facto "misrepresentation".
If you are legitimately using the same methods/strategy, if you clearly disclose the difference between prop/fund trading numbers, you are absolutely fine. ABSOLUTELY.