Setting up a prop-trading firm vs. a hedge fund

[PBS]

I am considering setting up a prop-trading company with $200k of my own capital to raise assets of around $1-2m from investors, giving me around 40% of shares and profits of the company.

My impression is that everyone is dreaming of creating a hedge fund whereas, for small capital and the expected rate of return of at least 100% per year, it makes much more sense to create a prop-trading firm rather than go for 2/20% model in a fund structure. 2/20% only makes sense for amounts $10m+ which, for me, is unrealistic to raise.

The reasons are as follows:
- full control of capital - no redemptions at the worst time from the investors and huge potential for compounding
- ability not to care that much about drawdowns in order to achieve those high returns
- no daily/monthly reporting - no calls/pressure from investors
- no regulation and lower admin costs.

Disadvantages are:
- corporate tax paid as the profits arise (a fund would be tax-exempt)
- lack of ability to raise more capital while maintaining the 40% share in profit (dilution of capital)

Would such a setup appear as a viable business to you?

 

[mikeriley]

Can you clarify this statement..

no daily/monthly reporting - no calls/pressure from investors

Do you mean investors are not privy to regular financial statements?

Would you invest in a company that failed to give
you timely reports? Most would not.

 

[PBS]

This would be a publicly-listed company on an exchange that requires only quarterly financial statements - and not detailed down to daily equity swings or trades executed. Just regular financial statement.

When I see a description of real-life costs and admin required to run a hedge fund I grow more convinced that 2/20% (or rather smaller nowadays) is not a good way to go.

see below - reply by Christopher Welsh:

How much can a partner at a hedge fund, roughly, expect to make? - Quora

 

[DaveV]

This would be a publicly-listed company on an exchange that requires only quarterly financial statements ...

Have you researched how much it costs to get a company listed on an exchange? My understanding is that it is not cheap. Although it seems that recently some new companies are getting around this by buying existing listed companies that are dirt cheap, and doing a big reverse split.

 

[zdreg]

I am considering setting up a prop-trading company with $200k of my own capital to raise assets of around $1-2m from investors, giving me around 40% of shares and profits of the company.

My impression is that everyone is dreaming of creating a hedge fund whereas, for small capital and the expected rate of return of at least 100% per year, it makes much more sense to create a prop-trading firm rather than go for 2/20% model in a fund structure. 2/20% only makes sense for amounts $10m+ which, for me, is unrealistic to raise.

The reasons are as follows:
- full control of capital - no redemptions at the worst time from the investors and huge potential for compounding
- ability not to care that much about drawdowns in order to achieve those high returns
- no daily/monthly reporting - no calls/pressure from investors
- no regulation and lower admin costs.

Disadvantages are:
- corporate tax paid as the profits arise (a fund would be tax-exempt)
- lack of ability to raise more capital while maintaining the 40% share in profit (dilution of capital)

Would such a setup appear as a viable business to you?

Where is your track record?

 

[newwurldmn]

Have you researched how much it costs to get a company listed on an exchange? My understanding is that it is not cheap. Although it seems that recently some new companies are getting around this by buying existing listed companies that are dirt cheap, and doing a big reverse split.

ongoing expenses are a problem as well.

 

[newwurldmn]

This would be a publicly-listed company on an exchange that requires only quarterly financial statements - and not detailed down to daily equity swings or trades executed. Just regular financial statement.

When I see a description of real-life costs and admin required to run a hedge fund I grow more convinced that 2/20% (or rather smaller nowadays) is not a good way to go.

see below - reply by Christopher Welsh:

How much can a partner at a hedge fund, roughly, expect to make? - Quora

these types of companies are poorly received by Wall Street. Often they trade at low PE’s meaning it’s hard to raise capital.

I doubt the economics work for anything less than 100mm.

 

[maxinger]

I am considering setting up a prop-trading company with $200k of my own capital to raise assets of around $1-2m from investors, giving me around 40% of shares and profits of the company.

My impression is that everyone is dreaming of creating a hedge fund whereas, for small capital and the expected rate of return of at least 100% per year, it makes much more sense to create a prop-trading firm rather than go for 2/20% model in a fund structure. 2/20% only makes sense for amounts $10m+ which, for me, is unrealistic to raise.

The reasons are as follows:
- full control of capital - no redemptions at the worst time from the investors and huge potential for compounding
- ability not to care that much about drawdowns in order to achieve those high returns
- no daily/monthly reporting - no calls/pressure from investors
- no regulation and lower admin costs.

Disadvantages are:
- corporate tax paid as the profits arise (a fund would be tax-exempt)
- lack of ability to raise more capital while maintaining the 40% share in profit (dilution of capital)

Would such a setup appear as a viable business to you?

both options sound bad unless you have a good track record.

If you have a good track record, both options sound good.

 

[M.W.]

I think you are hopelessly naive about your pursuit. A publicly listed company with the amount of equity you stated? Every exchange will laugh into your face. You won't meet even the minimum listing requirements by far. And if you wanted to list a company you would be confronted with a wealth of regulatory reporting requirements that would cost you at least tens of thousands in legal fees, all coming out of YOUR pockets not the ones of your investors.

This would be a publicly-listed company on an exchange that requires only quarterly financial statements - and not detailed down to daily equity swings or trades executed. Just regular financial statement.

When I see a description of real-life costs and admin required to run a hedge fund I grow more convinced that 2/20% (or rather smaller nowadays) is not a good way to go.

see below - reply by Christopher Welsh:

How much can a partner at a hedge fund, roughly, expect to make? - Quora

 

[Heydrrich]

Where is your track record?

Why the question ? There is none.