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

[cruisecontrol]

Cruise, would this not be circumventing the rules on required regs to attract investment? Unless you tied the loan to an absolute rate of return it would be classified as investing wouldn't it? I'm UK based so may well be different but interested if you know

You are correct. If you do this it needs to be a standard loan with a fixed interest rate. A ""loan"" that has any terms tied to investment performance would be fund management /investment business.

 

[PBS]

I am glad I inspired some discussion here. 2/20% model has only been introduced not so long ago and it seems it was not a good idea. Besides, now the average is 1.6/16.4% (figure I memorised from an article on the topic, can't remember where I read it though). Moreover, hedge funds like BlueCrest Capital have abandoned this model and now are basically a partnership trading only its partners' money.

Companies like Commodities Corporation were also just that - a corporation, not a fund.

So there is some rationale behind thinking of raising money as a company/partnership rather than a fund.

 

[traderjo]

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?

"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." which exchange would that be? with such a low cost of entry and after that you still have to spend money on marketing your company IPO!