raising funds

[Epic]

Quote from heech:

I think you're right. Epic and I both are in the commodity/futures/CFTC world, and things are much simpler from a taxation/fees point of view. Looking at njrookie1's post, he's asking about a FA... so dealing with equities + securities. I still haven't passed my series whatever you need for the securities business, and puzzles like this are exactly why.

I hate to be so unhelpful (or maybe I *am* being helpful)... but my advice is: ask an attorney + accountant. The complexities are mind-boggling.

Ah yes... I didn't notice that. I tend to think about everything in managed accounts in terms of futures only, because that is the world I live in.

I've passed the series 65 and series 3. I find managed futures to be much easier to run a profitable business, and includes many benefits for clients. JMHO

 

[njrookie1]

Yes I trade both futures and securities (mainly ETFs). I like some ETF versions of futures since the bid-ask is tight and execution is cheaper and faster.

Let me clarify. If I trade both, then performance fees are no longer deductible? What about management fees? Since I am not registered (exempt), I do not really know the procedures/regulations.

If I accumulate a mid-seven figures account and keep on achieving high double-digit returns with low DD, it is going to be hard to justify using OPM.

I feel OPM only makes sense if you can manage 100s of millions. Lots of hedge fund I know manage a couple of billions with a dozen or so people. Many of them however is happy with high-single digit or low teens returns.

I probably can raise 10-20 mill over time. However it is probably too much hassle to deal with. Even those clients right now with low 100Ks accounts are very very nervous with their money.

njrookie

 

[Epic]

Quote from njrookie1:

Heech,

You sound just like my wife

"Too much stress, potentially ruined friendship and family relationships."

I was curious how I will trade with OPM. Also managing OPM sounds like a job, while trading to lots of people is like a hobby.

I am still accumulating capital. Once it reaches 7 figures (hopefully in the next year or two) I probably will return all clients money. This is going to be the first year. It frankly does not matter whether I charge them or not. It is not going to make a difference right now. I just want to build a record in case I start to manage more money down the road.

For managed account, are you worried that they might copy/steal your strategy? For my case, IB allows client to see your positions in real time and they can probably free-ride if they want to.

njrookie

Sounds like you're finally starting to see the light. If you get good returns, many times it isn't worth it to try to manage OPM. The only reason that I do is for the ability to make more than $1MM annual in fees. If it was less than that, then i would just trade my own capital.

IMO, it isn't worth doing it if you are at all under-capitalized. I would put the thresholds somewhere around this;

Annual returns <20% == $20MM startup capital
Returns 21-50% == $$10MM
51-75% == $5MM

Like Heech, I also have a 0/30 fee schedule. I raised $3MM fairly easily within a couple months of launch, but I already had 18 month documented history of real trading for the program. Also, the program returns are more than 2X what you are talking about with the same sharpe.

BTW, you don't need to take on clients to establish a track record and forming a fund or adviser is easier than most people make it out to be. But is it really worth the headache?

 

[Epic]

Quote from njrookie1:

Yes I trade both futures and securities (mainly ETFs). I like some ETF versions of futures since the bid-ask is tight and execution is cheaper and faster.

Let me clarify. If I trade both, then performance fees are no longer deductible? What about management fees? Since I am not registered (exempt), I do not really know the procedures/regulations.

If I accumulate a mid-seven figures account and keep on achieving high double-digit returns with low DD, it is going to be hard to justify using OPM.

I feel OPM only makes sense if you can manage 100s of millions. Lots of hedge fund I know manage a couple of billions with a dozen or so people. Many of them however is happy with high-single digit or low teens returns.

I probably can raise 10-20 mill over time. However it is probably too much hassle to deal with. Even those clients right now with low 100Ks accounts are very very nervous with their money.

njrookie

This is just my opinion. So take it with a grain of salt.

If it is at all possible to execute your same strategy in futures only, then that is what I would do. The tax advantages are large, and running the business is much easier.

If you can form a CTA and run managed accounts, then that is also what I would do in your case. It is much easier to setup and get running. Also, much cheaper to operate each year because NFA compliance is easier.

I also wouldn't worry too much about your strategy getting ripped off. I was worried about that for a long time, but then I started to realize how difficult it would be for someone to do it. And like Heech says, why put in all that effort and risk when they could just hire me and know what they are getting? Keep in mind too, that the only way the clients would have real-time access to their accounts is if you let them. With IB, there are two ways to setup client accounts, with or without trading access. If they do not have trading access, then they only have daily access to trading activity statements. If you enable access, then they can login to TWS and follow along in real-time. I only allow one client to do that and will be removing that privilege soon. There isn't any good reason why a client would need to follow along in real-time.

 

[Epic]

Quote from heech:


For me, the greatest pressure doesn't come from losing OPM money... because I haven't really yet. Most of my investors are more patient than I am, as it happens. The aspect I dislike the most is the feeling of constantly being evaluated by the "public", potential investors, competitors, friends, family... Imagine performing your current job, except with your week to week performance up for open examination and public review. ("I think you flipped your burgers too slowly! More mayo!")

+1

My clients don't care nearly as much as I do about short term performance, but I know that my numbers must look good to keep growing, and the constant scrutiny is tiresome.

 

[njrookie1]

Hi Heech and Epic,

Thanks for sharing. This is really really helpful.

Are both of you using IB? Are you and your clients happy with their handling of paperwork, like statement and tax forms? The handling of trade information for tax purpose can be a huge problem for these clients.

I guess if it is only futures then it is easy since it is market to market automatically. I trade lots of securities and it could be a nightmare for tax filing.

njrookie

 

[newwurldmn]

Quote from njrookie1:

to implement this is going to be difficult:

"Returns less than or equal to S&P 500 - No Fee"

the benchmark for trading should be risk-free rate. for a year when sp500 recovered from a big down turn like 2009, it is difficult for trader to hold a big long position.

njrookie

If your performance is benchmarked to the S&P500 it's reasonable to expect you to have a beta of 1 most of the time. Otherwise the benchmark is non-sensical.

RE: Trader status, my accountant said that the strategy had to qualify, not the individual. If the individual has a day job he would almost immediately be disqualified. Like I said before, I have spoken to two accountants and two lawyers and have not gotten straight answers, so a lot of it is subject to interpretation.

 

[njrookie1]

My beta is zero - more or less market neutral.

I have a day job job but have never been disqualified for trader status. I have been audited two times without any problem with IRS.

I guess once they see you have over 15 million shares and 400 million dollars traded, they do not want to argue with you

njrookie

 

[Epic]

Quote from newwurldmn:

If your performance is benchmarked to the S&P500 it's reasonable to expect you to have a beta of 1 most of the time. Otherwise the benchmark is non-sensical.

RE: Trader status, my accountant said that the strategy had to qualify, not the individual. If the individual has a day job he would almost immediately be disqualified. Like I said before, I have spoken to two accountants and two lawyers and have not gotten straight answers, so a lot of it is subject to interpretation.

A benchmark or hurdle rate really has nothing to do with beta. What it suggests is that any idiot can invest blindly in SPY and get normal market returns. It is the skilled manager who can exceed this, and he should be paid for this skill. Beta is really irrelevant IMO. Obviously we are only talking about fees on absolute returns here, as you can't charge a performance fee for losing less than the benchmark index.

Re: tax, it is going to be very difficult to get a straight answer on any of it, but I would look at it a different way. There are hundreds of funds out there that employ strategies too inactive to qualify as day trading. These same funds typically charge 20% performance fees. In 2009 many of them achieved significant returns as the market rallied from lows. I'd bet there wasn't even a handful of clients who paid tax on the fees.

That's just like a normal business having to pay tax on gross sales revenue with no deduction for material cost. It would be really hard for the IRS to win a legal battle based on this premise.

In any case, why is this even a consideration? We are talking about a 2% floor, not a 2% ceiling. If your performance fees end up being less than 2% of someone's income, then either your fees weren't that significant or the person is making a huge amount of money and either way the fee deduction is sort of a non-issue.

 

[newwurldmn]

Quote from Epic:

A benchmark or hurdle rate really has nothing to do with beta. What it suggests is that any idiot can invest blindly in SPY and get normal market returns. It is the skilled manager who can exceed this, and he should be paid for this skill. Beta is really irrelevant IMO. Obviously we are only talking about fees on absolute returns here, as you can't charge a performance fee for losing less than the benchmark index.

My theory, but if you are saying you will generate alpha to a moving target, then it's not unreasonble to expect to have beta to that moving target. Otherwise it's a pointless comparison. If I can make more money betting on horses than in the SPX that's great, but it doesn't do an investor looking to beat the SPX as he's looking at it from that perspective with respect to risk characteristics.

Re: tax, it is going to be very difficult to get a straight answer on any of it, but I would look at it a different way. There are hundreds of funds out there that employ strategies too inactive to qualify as day trading. These same funds typically charge 20% performance fees. In 2009 many of them achieved significant returns as the market rallied from lows. I'd bet there wasn't even a handful of clients who paid tax on the fees.

That's just like a normal business having to pay tax on gross sales revenue with no deduction for material cost. It would be really hard for the IRS to win a legal battle based on this premise.

In any case, why is this even a consideration? We are talking about a 2% floor, not a 2% ceiling. If your performance fees end up being less than 2% of someone's income, then either your fees weren't that significant or the person is making a huge amount of money and either way the fee deduction is sort of a non-issue.

If you are doing a fund (ie a partnership) it's a different tax situation entirely. I was referring to managed accounts, where the assets are held in the clients name and you are "logging in as him."

The rules don't have to make sense. It's stupid that an active trader gets a different deduction than a guy who trades every week.

You are right about the 2% floor being potentially very small. On the other hand it can be very big depending on the clients other income, assets, and other deductions. Regardless on the value judgement about how much money is a lot, it's not automatic that all the fees they pay you in a managed accounts set up is deductible.