You talking about that dude who didn't graduate highschool and works out of an attic type office?
Starting a fund / raising capital
- Thread starter doublet83
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You talking about that dude who didn't graduate highschool and works out of an attic type office?
Let me try summarize my impression of some of the advantages and disadvantages of the managed account vs private fund structure. These are just my impressions, much of which have been gleaned from ET, so I could be wrong. Anyone with knowledge on the subject please chime in.
Managed account structure
-Greater transparency and control makes certain investors much more comfortable investing their money.
-Relatively easy to get started using IB's family and friends system, with IB handling your reporting, fee deductions, tax reporting, etc.
Disadvantages:
-Must become a registered investoment advisor to manage more than a very small number of accounts. However, the difficulty and compliance requirements of becoming an RIA may not be that onerous.
-Since account still remains under the name of the investor, there could be compliance issues that restrict my friends from investing under this structure (most of my friends work in finance and are subject to trading restrictions. not sure if managed account structure bypass these).
Private fund structure
-Do not have to register, but not being registered reduces your marketability with larger clients.
-Can have potentially 35 non-accredited investors if you keep your investor limit to 100.
-Can have up to 499 accredited investors if everyone is accredited.
-Private fund gives the manager ability to increase the level of secrecy surrounding his strategies.
-Owner can potentially take advantage of carried interest's favorable tax treatment (??)
-Fund's trackrecord seems to be more institutionalized and may therefore be more valuable (??)
Disadvantages:
-More complicated start up costs (??) There are turn key fund services that can do this work for 20k (I'm not sure why you don't need some of the legal contract work for a managed account structure).
-Cost of E&O insurance is much higher.
-Reporting is an hassle. I believe a previous poster mentioned the need to file tax reporting documents for every state a LP resides in. Accounting is a hassle and needs to account for whenever someone puts in or takes out money. Not sure what other issues there are on this front.
Managed account structure
-Greater transparency and control makes certain investors much more comfortable investing their money.
-Relatively easy to get started using IB's family and friends system, with IB handling your reporting, fee deductions, tax reporting, etc.
Disadvantages:
-Must become a registered investoment advisor to manage more than a very small number of accounts. However, the difficulty and compliance requirements of becoming an RIA may not be that onerous.
-Since account still remains under the name of the investor, there could be compliance issues that restrict my friends from investing under this structure (most of my friends work in finance and are subject to trading restrictions. not sure if managed account structure bypass these).
Private fund structure
-Do not have to register, but not being registered reduces your marketability with larger clients.
-Can have potentially 35 non-accredited investors if you keep your investor limit to 100.
-Can have up to 499 accredited investors if everyone is accredited.
-Private fund gives the manager ability to increase the level of secrecy surrounding his strategies.
-Owner can potentially take advantage of carried interest's favorable tax treatment (??)
-Fund's trackrecord seems to be more institutionalized and may therefore be more valuable (??)
Disadvantages:
-More complicated start up costs (??) There are turn key fund services that can do this work for 20k (I'm not sure why you don't need some of the legal contract work for a managed account structure).
-Cost of E&O insurance is much higher.
-Reporting is an hassle. I believe a previous poster mentioned the need to file tax reporting documents for every state a LP resides in. Accounting is a hassle and needs to account for whenever someone puts in or takes out money. Not sure what other issues there are on this front.
There is no longer an exemption under federal law for advisors of a few accounts. The exemption only applies when all clients are private funds (with no limit of client#). Yes, IB will facilitate you charging fees to 5 accounts that need not be private funds, but it would be unlawful for you to do so. So with respect to your train of thought, it would be more precise to say "must become a registered advisor to manage accounts that are not private funds". And no, asking clients to drop their cash into a SMLLC does not make it a private fund, because of the statutory definition of a private fund (IAA40-202-29: "that would be an investment company but for ICA40-3c1/3c7")
The compliance issue is the same whether it is in a separate account in the investors name, in a separate account under your name as nominee, or is pooled with other investors in an LP/LLC/trust/corp structure. Arguably, it is harder to get compliance to sign off on Private Security Transactions. If they are only allowed to maintain securities accounts with their employer, you may have to use their employer as custodian (and worse, broker as well). If you have six friends working for six Wall St firms⦠well you can see why you would want to explore executing at IB and using each of their employers as prime brokers for each respective accounts. What a hassle but this has nothing to do with this thread. I have some insight into this: my employer is regulated by FINRA & SEC, and my wife's employer is regulated by FINRA, SEC, and the Federal Reserve.
Can have up to 499 qualified purchasers if everyone is a qualified purchaser.
You essentially get two choices: let clients get statements from the custodian, or you pay for an audit. However, this is true of both a hedge fund and a separate account. (in this case the separate account will be held in your name as agent for the client)
You can do so as well with separate accounts. This is quite popular with fiduciary clients (pension plan administrator, municipal/corporate treasurers, endowment trustees) Ask me about the mechanics if this interests you, but essentially you and your investor enter into a general partnership (you 0% capital interest 20% profit interest, client 100% capital interest 80% profit interest) and your investor maintains the account in his name as agent of the general partnership. A tax return will need to be filed.
However, if substantial amounts of your trading profit will be short term capital gains, then receiving carried interest has no economic benefit to you. Well, I guess it would if the advisory business was owned by your siblings/girlfriends Roth IRA, with you as its mere employee. (IRC/DOL prohibited transaction rules prevent you from capitalizing more than 50.00% of the biz in your, your parents, your children's, or your spouse's retirement account)
I don't believe in this one bit. Audited performance #s are the same to anyone who cares, whether the account audited is your IRA or some LLC/LP. Folks only care about the performance#, the provenance of the auditor, and reporting methodology (GIPS compliance or some other)
Good guys can do it for closer to $15k these days. You will need to incur the expense of developing advisory contracts, disclosures, and policies/procedures for managing both separate accounts and a single fund, which should run you $3k. In addition, a fund requires specialist work in partnership law, as well as securities laws in the context of issuing securities. That is what pretty much rings up the $15k tab.
It is false that a limited partnership will need to file tax returns in every jurisdiction in which its (the partnership) limited partners live. The partnership will only need to file tax returns in its jurisdiction of domicile, as well as every jurisdiction in which it does business. In practice, for an investment partnership, these will be the state in which the partnership gets its charter, as well as the states in which the managers, administrators, and advisors do business. As an example, let us say you live in New York, and I live in California. You serve as general partner, and I serve as limited partner. The limited partnership will file a federal tax return as well as a New York state tax return, and will send me my schedule K-1. I will use the K-1 you had sent me to prepare both my federal and California personal income taxes. You will use your schedule K-1 to prepare your federal and NYS personal income taxes.
Partnership accounting is not something you can do with Quicken. Partnership accounting, and the resultant tax preparation work, is not cheap. You can justify the expense when you have several partners and investment income to cover the expense. It is customary that these audit, accounting, and tax-prep expenses be borne by the fund itself and not the fund manager. Your investors would freak if the expenses allocable to them represented a significant fixed expense. The nice things about separate accounts is what is essentially free bundled accounting work. IB even will calc performance fees at no additional cost, if both you and the investor are comfortable with IB's accounting methodology for performance fees.