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Prop vs. Hedge Fund
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(I may be bias, but I have honestly talked dozens of "hedge fund wannabees" out of doing so for some of the following reasons).
First off, we need to actually define "hedge fund"....many whom I've spoken with are talking about "borrowing' money from friends and relatives under the guise of "hedge fund" in an attempt to add some legitimacy to the venture.
In that case, it makes little or no sense to have this "hedge fund" because you have all your relatives bugging you at every turn...and it's still not enough $$ to participate in most working strategies. And, if you're any good, would you want to give away 80% of the profits....a decent prop firm would take $50K or so, and let you use a couple of million, and you keep all the profits.
Second scenario is trying to go out and raise $30Million or so... pretty hard to do....your 2% "vig" would make sense at this level, but you have a lot of regulatory and tax hassles....but this makes some sense overall.
It boils down to whether you plan on using the capital to actually make money, or to siphon off the vig and hope for the best. This may sound "offensive" - but all I can do is go by the many people I've interviewed and discussed this with.
Yes, we have had hedge funds under our wing, fwiw.
And, BTW....I noticed some speculation above about prop firm's using traders money or outside money...just for the record, we have no outside money, and don't need to use our traders money.
All the best,
Don
First off, we need to actually define "hedge fund"....many whom I've spoken with are talking about "borrowing' money from friends and relatives under the guise of "hedge fund" in an attempt to add some legitimacy to the venture.
In that case, it makes little or no sense to have this "hedge fund" because you have all your relatives bugging you at every turn...and it's still not enough $$ to participate in most working strategies. And, if you're any good, would you want to give away 80% of the profits....a decent prop firm would take $50K or so, and let you use a couple of million, and you keep all the profits.
Second scenario is trying to go out and raise $30Million or so... pretty hard to do....your 2% "vig" would make sense at this level, but you have a lot of regulatory and tax hassles....but this makes some sense overall.
It boils down to whether you plan on using the capital to actually make money, or to siphon off the vig and hope for the best. This may sound "offensive" - but all I can do is go by the many people I've interviewed and discussed this with.
Yes, we have had hedge funds under our wing, fwiw.
And, BTW....I noticed some speculation above about prop firm's using traders money or outside money...just for the record, we have no outside money, and don't need to use our traders money.
All the best,
Don
Quote from toc:
'a decent prop firm would take $50K or so, and let you use a couple of million, and you keep all the profits.'
what is in it for prop then? does the trader use his own or prop firms strategies.
Maverick has it right...we don't take any of the traders profits, we simply supply the tools (capital, market access, platform, and training)...we have a great number of traders who trade their own strategies....we offer help with "what is working currently" based on what we see...but traders tend to morph several strategies (at least the good traders). Any trader will have to pay commissions, just as a truck driver has to buy gas. But, it's kind of nice to have access to enough money to get involved in strategies that actually work, rather than struggling with the PDT rules.
For any newer people, this is the "exchange, floor trading business model" - similar to what my brother and I engaged in from the "other side" a couple of decades ago.
All the best,
Don
One other question:
What is the LEGAL interpretation of soliciting outside money from "investors / traders / etc"...pooling it together in some sort of LLP or LLC and then that organization joining a Prop Firm?
Does that fall under Regulatory oversight? Registered Investment Company? Unregulated Hedge Fund? SEC or Blue Law Approvals?
What is the LEGAL interpretation of soliciting outside money from "investors / traders / etc"...pooling it together in some sort of LLP or LLC and then that organization joining a Prop Firm?
Does that fall under Regulatory oversight? Registered Investment Company? Unregulated Hedge Fund? SEC or Blue Law Approvals?
Quote from craigatelite:
One other question:
What is the LEGAL interpretation of soliciting outside money from "investors / traders / etc"...pooling it together in some sort of LLP or LLC and then that organization joining a Prop Firm?
Does that fall under Regulatory oversight? Registered Investment Company? Unregulated Hedge Fund? SEC or Blue Law Approvals?
I would also be very interested to know how this was structured, Don.
-segv
Quote from craigatelite:
One other question:
What is the LEGAL interpretation of soliciting outside money from "investors / traders / etc"...pooling it together in some sort of LLP or LLC and then that organization joining a Prop Firm?
Does that fall under Regulatory oversight? Registered Investment Company? Unregulated Hedge Fund? SEC or Blue Law Approvals?
The answer is, it depends. I believe the cut off is 15 million dollars. In other words, if you raise more then that, then you need an offering document and your investors need to be accredited. Under 15 million you can setup a simple LLC structure. I may be wrong on this, but I don't think so.
The cut off is max 15 investors and max 25 million over which you will have to register with SEC as a RIA and also as a Hedge Fund if you charge percentage of profits like 2-20% structure of Hedge Funds. Each investor has to be accredited i.e. net worth of 1M or each of last two years made $200K in income. Also new rule is if you go to another Hedge Fund and take their account then that is not 1 account, that is equal to all the investors that HF has, if they have 81 then you shoot over 15 client limit right away. There are other minor details that should be checked also.
I doubt 90% of traders would be able to learn some strategy, and that too rapid fire frequent trading style that is proposed by props and follow it to the successful lines month after month. That is why prop career is very short for majority of them. Don might want to comment on the turnaround of traders at props. Worst, money management advise says do not risk more than 3% of your capital on a trade and in props it is opposite due to the margins at play.
The better way would be to use 1x i.e. 100% margin on the good strategy giving 20%/year with lots of confidence and not video game type trading. Then use other parties money to offer them 20% at 2% a year fees. Anything you make via using margin is yours to keep etc. or have some hurdle rate to take incentives. Prop trading may be like flying through heavy flak fire on a thunderstorm night. Not my style or capability. Better to respect the markets and trade conservatively. 90% of the investors (not traders!) make 9-10% a year, if you come out ahead with 15-20%, you are an elite investor.
I doubt 90% of traders would be able to learn some strategy, and that too rapid fire frequent trading style that is proposed by props and follow it to the successful lines month after month. That is why prop career is very short for majority of them. Don might want to comment on the turnaround of traders at props. Worst, money management advise says do not risk more than 3% of your capital on a trade and in props it is opposite due to the margins at play.
The better way would be to use 1x i.e. 100% margin on the good strategy giving 20%/year with lots of confidence and not video game type trading. Then use other parties money to offer them 20% at 2% a year fees. Anything you make via using margin is yours to keep etc. or have some hurdle rate to take incentives. Prop trading may be like flying through heavy flak fire on a thunderstorm night. Not my style or capability. Better to respect the markets and trade conservatively. 90% of the investors (not traders!) make 9-10% a year, if you come out ahead with 15-20%, you are an elite investor.