Starting a fund / raising capital

mastacoli71 · Jun 10, 2012

Quote from doublet83:

Many have recommended IB's friends and family as the easiest way to start up and I am beginning to agree. However, what legal structure should my investment management company be operating under?

Sole proprietarship, LLC, LLP, etc? After some basic reading, sole proprietarship seems simpliest and I don't see what advantages the other structures confer..

if u want to raise money in the future, u need something audited. friends and family acct won't cut it.

Busta21 · Jun 10, 2012

Quote from mastacoli71:

if u want to raise money in the future, u need something audited. friends and family acct won't cut it.

FF would be an audited track record. Curious to what the difference is whether the funds are pooled or whether the performance is via separate accounts?

thunderbolttr · Jun 11, 2012

Quote from doublet83:

I actually misread. It says you don't need to be a RIA unleses you are managing more than 15 accounts

IB probably originally came up with 15 a while ago based on the SEC's private adviser exemption. But the Dodd-Frank Act eliminated this exemption.

Busta21 · Jun 11, 2012

Quote from Busta21:

So what statute is allowing the person trading the family and friends account to be paid via a performance fee since the investors are non accredited? How is this structured legally?

Still wondering if any of you have an answer to this?????

heech · Jun 11, 2012

Quote from Busta21:

Still wondering if any of you have an answer to this?????

The point is to gain exemption from the investment adviser's act. Previously, the SEC allowed such an exemption for anyone with less than 15 clients, and didn't hold themselves out as an investment advisors to the public (thus, friends and family).

But that rule has actually changed very recently... so now, by my reading, you're really only able to offer these services to your extended family:

http://www.lathropgage.com/newsletter-12.html

Not sure if/how IB will be updating their rules.

Busta21 · Jun 11, 2012

Quote from heech:

The point is to gain exemption from the investment adviser's act. Previously, the SEC allowed such an exemption for anyone with less than 15 clients, and didn't hold themselves out as an investment advisors to the public (thus, friends and family).

But that rule has actually changed very recently... so now, by my reading, you're really only able to offer these services to your extended family:

http://www.lathropgage.com/newsletter-12.html

Not sure if/how IB will be updating their rules.

I wonder if there is a way to have the people you advise form an LLC of sorts and then form a fee structure based around that. Or you could form an LLC with your investors and delegate % returns based on capital put up. There has to be away around this accredited investor rule. If you ask me that rule is biased toward the 'average' man Barney Frank and his cronies seek to protect.

heech · Jun 11, 2012

Quote from Busta21:

I wonder if there is a way to have the people you advise form an LLC of sorts and then form a fee structure based around that. Or you could form an LLC with your investors and delegate % returns based on capital put up. There has to be away around this accredited investor rule. If you ask me that rule is biased toward the 'average' man Barney Frank and his cronies seek to protect.

You can't beat the system by hiding behind an entity. But the new JOBS act is totally rewriting the rules in terms of what non-accredited investors can invest in. So wait 3-6 months and the SEC will tell us what's possible.

As far as why these rules exist... I subscribe to the CFTC/SEC enforcement newsletters. The amount of fraud out there is unbelievable. I personally think a non-accredited investor doesn't have much reason to find a money manager. A real money manager with a sustainable edge might deliver what, 2-5% extra returns every year? What's that worth to someone with less than $100k in the bank? The potential gains to the client are minimal, the probability that they understand the risk is minimal, the opportunity for them to be defrauded is extremely high.

DeltaSpread · Jun 11, 2012

Quote from doublet83:

I actually misread. It says you don't need to be a RIA unleses you are managing more than 15 accounts

Lets just say hypothetically you did go the RIA path. Even if you ran the whole show being founder & CEO and essentially an independent, you still would need to establish a relationship with a broker dealer who services RIA's in order to maintain your licenses and provide clearing/trading services or no?

And to become an RIA in the first place, you need to get your securities related licenses and register through said broker dealer. IB does not provide this kind of fuction or yes?

caementarius · Jun 12, 2012

Doesn't necessarily apply to OP, but if anyone is looking to do this with futures, becoming a CTA, which just involves passing Series 3 and creating disclosure docs, seems like the easiest way to go. And, you can hold yourself out there as an advisor and publish returns. The registration/testing costs are like $1500 or thereabouts.

Gil Young Jo · Jun 13, 2012

Quick question: does trading your own capital for 5 years, followed by a thorough audit by one of the big accounting firms (PWC, Ernst & Young, etc.) qualify as a track record for raising "hedge fund" capital?

Thanks in advance for all the replies...