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

Go live your dream and work whatever model you choose and disclose. There will be obstacles all along the way. Everybody successful and well-known trader started somewhere. Every failure also started somewhere. If you can demonstrate results investors will beat a path to your door. You can literally buy a hedge fund in a box start-up package. A public fund will be a tough expensive path, but you're in Europe and you'd be amazed at what you can in the smaller countries and on their exchanges - especially if you just want to list and do sell shares.
 
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PBS said:
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?
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I have given it some thought before and it doesn't make too much sense for me, because of taxes and audits.
 
Feel free the message me if you go the hedge fund way, I can nudge you in the right direction.
Think ballpark 30k Euro to start a sub fund.
 
PBS said:
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
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Maybe terminology is confusing the issue here, but becoming a publicly listed company - ie floating on the stock exchange - isn't viable with that kind of capital as others have mentioned. Even though £1m cap is acceptable on AIM, it'll cost at least a few hundred grand to list.

But maybe you're talking about simply becoming a limited company (with associated regs required to set up as prop fund) which would be doable. But, the regs - in my limited understanding - are pretty onerous, and the journey more onerous than starting up an off the peg fund. I've been quoted around £30kgbp, so Chuck at 30keuro would be worth investigating - and no, I don't know him!
 
Says the guy who toils and shills for an exchange...that's rich... :D

ajacobson said:
Go live your dream and work whatever model you choose and disclose. There will be obstacles all along the way. Everybody successful and well-known trader started somewhere. Every failure also started somewhere. If you can demonstrate results investors will beat a path to your door. You can literally buy a hedge fund in a box start-up package. A public fund will be a tough expensive path, but you're in Europe and you'd be amazed at what you can in the smaller countries and on their exchanges - especially if you just want to list and do sell shares.
More...
 
I do not care too much about listing but it is just a standard way to raise capital in some European countries. There are a few exchanges where it is standard to raise up to about $1-2m (but not much more) with listing costs of maybe $30-50k. I am not talking NYSE here. For some reason it is common practice to list a company even though this listing does not help much if an investor wants to exit due to lack of liquidity. Just an odd way things are in some European countries. I do not understand why it is like that but without listing it would be really hard to raise capital.

Creating a fund for $30k is certainly possible but raising enough assets for 2/20% to make sense is impossible for me, in my opinion. I do not believe "money will find you" with good results. There are many examples of CTAs that have great stats, have been in business for 10+ years, yet manage only $1m. That is why I thought of a company with all the pros and cons it entails.

I could then focus on trading, reporting to investors only once a quarter, without too much paperwork, admin costs, dealing with regulations, without the risk of being left with no capital due to redemptions, without having to answer investors' calls/messages about why we are down 0.1% or why we are up only 2% although the market (equity index which we have zero correlation with) is up 3%. Trading, compounding, paying out 10% of profits as dividends and that is it - my idea of how this would work.

I am open to suggestions - you have $300k, you can get $1-2m of investors' money but not more. What business model would you choose to make it most beneficial for yourself and the investors? Or perhaps you would trade your own money only?
 
"Says the guy who toils and shills for an exchange...that's rich... :D"

FIVE YEARS OUT OF THE EXCHANGE COMMUNITY. I WAS A SELF STARTER - STARTING WITH NOTHING. ADDITIONALLY, I AM SUCCESSFUL. SO APPARENTLY IT CAN BE DONE.
SOUNDS MORE LIKE JEALOUSY THAN CRITICISM.

THANKS,
 
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2/20 is not viable for small amounts as you found. Basic math.

Prop startup is definitely viable for a good trader. You can just trade your own money and still benefit from lower corporate tax. If you want to raise capital you'll either need an amazing track record, rich relatives or be a good salesman.

Depending on how consistent your profits are, it may make sense to raise debt instead of equity capital.


Btw which country in europe lets you publically list a startup company with only one director and $1m capital? I'm very skeptical / would be surprised if this is real.
 
PBS said:
Would such a setup appear as a viable business to you?
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I am running a prop group and small AIF. Me, for example, I need partners to grow the structure. You can try to do this with existing biz (mine, or some other people). This would save some costs.
 
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