Questions regarding being an OPM person

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newalias

Yes, I started another thread about managing other peoples money. To top it off I created a temporary alias to avoid getting swamped with spam from those who "can help".
Thinking about managing other peoples money. Small amounts relative to what most claim or do and I intend to keep my interest at 60-75%. Looking at $500,000 total to start. I've had friends after me for a few years, and I always said I didn't want to deal with their phone calls everytime the markets moved. I guess with old age I am seeing the benefit of additional income from I am going to be doing anyway. I downplay returns, and offer these people that there is always the chance I would lose it all, and I won't take a dime if it is money they might need. I also emphasize that I would distribute money every year and it would incur a tax obligation as I have no desire to grow big. I trade for income, and this would provide more income for me, and I expect my share of the "fund" would grow as I could reduce my take of basis by what I could take in fees.
Anyway, I would appreciate input on legal obligations, headaches, etc. I don't think with the dollar amount or the number of people(5-8) I would need to license, but I guess I could. I would trade equities and futures so I am assuming that would involve more than 1 regulatory agency I would need to check, and looking to find out for sure where to start that process.
I'm still inclined to say this isn't worth it, but after years of asking, and the idea of it could generate another income I am willing to look into the idea.
Any thoughts are welcome.
Oh yea, I make no claims of ridiculous returns, but these people know I have made money through thick and thin in the markets. At the same time I haven't been doing 100% or that garbage year after year, so that is not my claim, just that I am consistent
 
let me keep this short b/c this subject (running opm vs just trading for yourself) has been beaten to death.

i strongly suggest NOT running opm unless you are running more than a billion and even then prob closer to five billion b/c the income you make won't be worth the hassles. you can see some of my posts on this subject and others as well. the big hedge funds live primarily off of management fees not performance fees anyways. look at paulson last year - he made ZERO dollars for his firm in performance fees.
 
Quote from FrankSlaughtery:

let me keep this short b/c this subject (running opm vs just trading for yourself) has been beaten to death.

i strongly suggest NOT running opm unless you are running more than a billion and even then prob closer to five billion b/c the income you make won't be worth the hassles. you can see some of my posts on this subject and others as well. the big hedge funds live primarily off of management fees not performance fees anyways. look at paulson last year - he made ZERO dollars for his firm in performance fees.
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You make more than 10MM a year?
 
Yeah, anything less than 100B really isn't interesting...

Interesting post, and something I've thought about myself. I can't speak from *experience* but have done plenty of research on the topic so will share the key points I've gotten. Note that this is not expert professional advice - please verify:

* Administratively, the most simple way is thru SMAs. I use IB and they make it easy to create a master account where you can control investments but not have custody of the funds. This is far preferable to a pooled structure (unless you're paranoid about your friends reverse engineering your trading strategies, but I'm guessing not based on your post). With a pooled structure, you need to (a) comply with all sorts of audits and record-keeping, (b) set up more entities, and (c) stress more that your friends are going to feel suckered if things go badly. If SMA, they can always log into their account, close out positions, etc... so I know I'd sleep better at night.

* Legal: depends on state (and I'm not a securities lawyer) but I think you'll need to register as an RIA, and ideally will need to set up an entity which is itself registered as the RIA, and then you as an IAR within it (investment advisor representative). I believe there's an exemption if less than $25-30M in assets *depending on state*. In many states, CA included, there is no exemption. You manage one penny (for a fee) or hold yourself out as a professional, you register. This can be done yourself, but sounds like a nightmare. A service will do it for you at a cost of $2-4K, and from what I hear that's a reasonable price. If you do it yourself, just keep in mind that you'll put up with $2-4K worth of headache to do so. Depending on your credentials, you may need to take a few exams (series 7/63 I think, but not certain). Note also that if you have any of your 5-6 friends in other places, you need to comply with their state laws too.

* Fees: If you're registered, or in a state with exemptions, you can charge a combo of %AUM and performance fees - this is where Dodd-Frank comes in. I believe that only HNW individuals are considered sophisticated enough to be charged a performance component (anything other than straight %AUM) and the bar has been raised with D-F. Now it requires $1M in non-housing investable assets (may also be non-IRA assets, but not sure). There's a whole discussion about rich=sophisticated, but I'll save it.

My imagined solution to this (as someone w/o lots of qualified investor friends) would be to charge a relative high AUM% only, which got reset each quarter/year based on performance from the prior quarter/year, and make this known. If you charge 5% AUM to friends, you're slime. But if you generated 25% of alpha the prior year for them, and you've agreed in advance that you're re-set the AUM fee each period based on trailing returns, I think you can keep your head high. The investor always has the choice to pull their money out and not pay the higher AUM fee if they choose, so it's transparent and fair. I would tend to believe that friends who just made 25% excess return wouldn't balk at 5% fee going forward if they believe you can do it again.

Any feedback on the above idea appreciated. Anyone out there familiar enough with regulatory considerations to guess whether this is not kosher?
 
Quote from sf631:

Yeah, anything less than 100B really isn't interesting...

Interesting post, and something I've thought about myself. I can't speak from *experience* but have done plenty of research on the topic so will share the key points I've gotten. Note that this is not expert professional advice - please verify:

* Administratively, the most simple way is thru SMAs. I use IB and they make it easy to create a master account where you can control investments but not have custody of the funds. This is far preferable to a pooled structure (unless you're paranoid about your friends reverse engineering your trading strategies, but I'm guessing not based on your post). With a pooled structure, you need to (a) comply with all sorts of audits and record-keeping, (b) set up more entities, and (c) stress more that your friends are going to feel suckered if things go badly. If SMA, they can always log into their account, close out positions, etc... so I know I'd sleep better at night.
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This is good.

Only thing to add is that you have a burden of proof that you are not unfairly favoring one account over another. I think that block trading with an algorithm to determine allocation (based on account size) would be sufficient.
 
+1 to everything sf631 said (didn't want to use quote feature b/c there's a lot). anyways only thing to add, IIRC new regs no longer allow you to avoid registering if you have below $25 million. could be wrong though.
 
I'm interested in anyone's comments on the idea I described for AUM fee resets. Using trailing performance as the guide to the future %AUM fee. (1) how would you feel if an adviser/friend proposed this to you, and (2) can anyone comment on whether this would run afoul of the no-performance-based-fees to non accredited investors regulations?
 
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