Start-Up Hedge Fund Question

Quote from WarEagle:

I understand your point Don, but I think the main difference is risk. With a fund setup, the risk is borne by the investors in that the trader could have a 30% drawdown and still trade back out of it without the investors pulling the plug on him (assuming they understood the risk profile coming in, certainly no one would be happy but that is part of qualifying investors first). In a prop environment, there is no way you would be allowed to lose 30% of a million with only $25k on deposit. Also, you would have more flexibility with holding overnight (my understanding is that most hedge funds are not daytrading in the strict sense) and also with regards to the instruments you trade.
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Yeah-- I still don't understand the prop trading firm model-- trying to learn how it works though so far I've been leaning on the hedge fund / LLC path.

Let me do the math: in a prop firm if they let you borrow 1 million for a $25k deposit, then isn't your initial maximum loss just 2.5% of trading capital before your are cut out? After that, you are eating into their capital. ? That doesn't seem to leave much room for error (or maybe everyone else's strategies are just 10 times better than mine) :)

Or I am guessing they don't give you 1 million at first, but probably makes more sense to just give you 100-200k, and if you have an upward equity curve growth that is pretty stable then they add you up to 1-10 million eventually (so they only add you up when you have more of a cushion)? I'm just guessing here.

-Taric
 
Thank you all for your helpful responses. I didn't realize the accounting expenses would be so high. I think you can minimize start-up costs through certain firms, like Green Trader Tax. Does anyone have experience with them?

Also, Don, I do understand your point, and I trade prop right now for basically those very reasons. But that is why I asked the question about doing both: keeping 95-100% of your prop account, while at the same time building relationships and hopefully growing the "hedge fund' account. To me the downside of prop is the lack of guaranteed income, though the upside is tremendous. If you were able to raise $5-10M, charge a 2% management fee, you could trade with the knowledge that you will still get paid decently. And psychologically to me, that is worth a lot. I find myself trading scared many times because one, I don't want to lose money, or two, I don't want to lose the money I have already made. Now mind you, I have done very well for myself trading for the last 5 years, but I truly believe that my potential has not been fully realized because of the fears I mentioned. We will see....
 
Whatever ur decision keep us aprised and the best of luck .... most of all lend your experiences back 2 the site both positive and negative as, Im sure there are others who wud like 2 hear the ins and outs....
 
Quote from ptunic:

Yeah-- I still don't understand the prop trading firm model-- trying to learn how it works though so far I've been leaning on the hedge fund / LLC path.

Let me do the math: in a prop firm if they let you borrow 1 million for a $25k deposit, then isn't your initial maximum loss just 2.5% of trading capital before your are cut out? After that, you are eating into their capital. ? That doesn't seem to leave much room for error (or maybe everyone else's strategies are just 10 times better than mine) :)

Or I am guessing they don't give you 1 million at first, but probably makes more sense to just give you 100-200k, and if you have an upward equity curve growth that is pretty stable then they add you up to 1-10 million eventually (so they only add you up when you have more of a cushion)? I'm just guessing here.

-Taric
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Yeah that's about right. Two points you forgot to mention: You are usually required to go home flat every night and you need to generate a lot of commission for the pit boss...or pay the difference in monthly seat fees.
 
Quote from rjontrades:

Thank you all for your helpful responses. I didn't realize the accounting expenses would be so high. I think you can minimize start-up costs through certain firms, like Green Trader Tax. Does anyone have experience with them?

Also, Don, I do understand your point, and I trade prop right now for basically those very reasons. But that is why I asked the question about doing both: keeping 95-100% of your prop account, while at the same time building relationships and hopefully growing the "hedge fund' account.
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Green Trader Tax is pretty good. I would recommend them. Sounds like you are already a "hedge fund" according to Don. Best of luck to you.
 
Ok, thanks ktm. One other question, do you generally pay interest on your trading capital? Or is that included in the commissions? I'm just thinking whoever is lending the 1 million / trading capital would want income from that, just wondering where it comes from.

Thanks,
-Taric
 
Quote from ptunic:

Ok, thanks ktm. One other question, do you generally pay interest on your trading capital? Or is that included in the commissions? I'm just thinking whoever is lending the 1 million / trading capital would want income from that, just wondering where it comes from.

Thanks,
-Taric
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Pay interest ??? Shouldnt you be "earning" the itnerest if your putting the capital into a firm ?????? or are you talking the money that someone is putting up for you .... sorry confused.......
 
Quote from AC3:

Pay interest ??? Shouldnt you be "earning" the itnerest if your putting the capital into a firm ?????? or are you talking the money that someone is putting up for you .... sorry confused.......
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Well, let's say I put in $25,000, that is one thing. But then let's say they give me $200,000 in buying power. And let's say I get good at this, so eventually they give me $10 million to trade with. I've only put in the initial $25,000. Somebody had to "lend" me the $10 million. Well, some investor would at the very least have to put up margin requirementes of say $1 million or so, if not the entire $10 million. Not sure if that makes sense. And I'm wondering how that investor (which could be the prop firm) gets compensated for lending me their capital to trade with.

-Taric
 
Quote from rjontrades:

Thank you all for your helpful responses. I didn't realize the accounting expenses would be so high. I think you can minimize start-up costs through certain firms, like Green Trader Tax. Does anyone have experience with them?

Also, Don, I do understand your point, and I trade prop right now for basically those very reasons. But that is why I asked the question about doing both: keeping 95-100% of your prop account, while at the same time building relationships and hopefully growing the "hedge fund' account. To me the downside of prop is the lack of guaranteed income, though the upside is tremendous. If you were able to raise $5-10M, charge a 2% management fee, you could trade with the knowledge that you will still get paid decently. And psychologically to me, that is worth a lot. I find myself trading scared many times because one, I don't want to lose money, or two, I don't want to lose the money I have already made. Now mind you, I have done very well for myself trading for the last 5 years, but I truly believe that my potential has not been fully realized because of the fears I mentioned. We will see....
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Please understand that I do understand and appreciate you point. At this stage in my life I probably wouldn't take the same business plan that I did 25 years ago...But back then, I figured the upside was worth the small downside (heck I was in Public Accounting, and didn't want to die of boredom, LOL).

Good Luck with the fund raising, and keep us posted!

Don
 
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