Starting a Hedge Fund

in the end of all this talk is that there are several investors who he "helps" trade. There is no way to do this at a firm prop. trading. the only real alternative is to form a hedge fund, or stop "helping" them. It really is as simple as that.

As for information, the main problem is those pesky fees associated with trading.

cheers
 
Most prime brokers offer uncompetitive commission rates for high volume trading (e.g., 6 cents per share plus ticket charge!), but even if you can find one with a reasonable fee, say 1 cent per share, it's nice to also be able to trade some stocks using another broker with a fixed ticket charge (e.g., $10 per trade up to 5000 shares). The problem is that I haven't found any prime brokers who offer reasonable clearing fees for trades with other brokers. For example, paying $15 per ticket for clearing away trades makes it pointless to trade with anyone other than the prime broker. If anyone knows a prime broker with an acceptable clearing fee structure (e.g., per position rather than per ticket, or a fraction of a cent per share), I would love to hear about it.

By the way, it is not necessary to have a prime broker in order to run a hedge fund. There are advantages to having a prime broker (e.g., netting out all positions for margin purposes), but you can also choose to operate your fund with its assets held in separate custody by each of your brokers (but note that some investors are wary of multiple custody).

...

Unrelated matter: hedge funds can be subject to state business taxes (which would not be applied to individual accounts). For example, my auditor reports that Florida has a high tax which it aggressively applies to hedge fund profits, so for their Florida clients they have to set up a legitimate Delaware place of business (not just incorporation and PO box). You need to thoroughly investigate this matter before launching your fund or you may get stuck with a large unexpected bill. (This is a complicated issue and the number of different opinions I have obtained is *greater* than the number of lawyers and accountants I have discussed it with.)
 
Thanks for the info.

My lawyer and accountant both sign my documents and we have agreements that they (and their firms) stand behind their actions. I agree much of this area is murky and I rely on their expertise to keep me moving in the right direction. Just as they wouldn't question my stockpicking, I don't question their legal advice.

Since I'm starting relatively small, I still plan to form the LLC and use IB. IB doesn't really care what business the LLC is engaged in for trading purposes . If you are a "non-natural person", you pay professional fees, so that's not an issue to worry about. I think the biggest factor is my trading style. Since I like to scale into declining positions, I am making many small purchases over time in a downward market. That style seems to favor the commission structure that IB has in place.
 
I have done some research on hedge funds since I left my prop firm to trade customer. ProTrader and ETG and a few other DAT firms will act as your prime broker, doing a lot of the back office items for a reasonable transactional fee (cents per share.) They claim to cater to small hedge funds looking to share back office expenses. I never folowed through with my fund because like our favorite advertiser (Don) I felt that I should just trade my own money.
 
I wish there was a way to start a Hedge Fund, but also get low commissions and high leverage. Am I correct to say that with Bright you can get relatively low comissions (order of 1 cent a share) and high leverage (more than 2x), but not as a Hedge Fund? And with IB, you can be a Hedge Fund with low comissions, but not have high leverage? And with a prime broker, you get high leverage but high comissions?
 
Originally posted by Don Bright
I have heard from so many people lately who are in the process of starting a "hedge fund." This term is mis-leading, and has been used to deceive people into giving money to someone to trade with. Why would anyone pay someone to trade for them? If the traders themselves were any good, they wouldn't need to use "other peoples money" OPM, to trade with. I have had a least a dozen calls in the last week...this must be the latest venture into the "snake-oil" pit.

And where in the world do they get people to put up this money...family? friends? (not for long).

If you're any good, put up $25K, use the firms' capital to trade with, and keep your profits (instead of charging a few points to your buddies). If you're not any good, then this may be a short term way to pay your bills, but extremely short term.

There may be a legitimate reason for starting a "fund" but I haven't heard of one yet.
More...

Holy Cow! Soros+Rogers, Vinik, Cohen, Robertson, etc. are sure plum lucky you never shared your wisdom with them Don !! I mean what were they thinking!?!

:D
 
"Holy Cow! Soros+Rogers, Vinik, Cohen, Robertson, etc. are sure plum lucky you never shared your wisdom with them Don !! I mean what were they thinking!?! "

But to be fair how many of these names started a hedge fund from scratch with no qualifications or experience as many seem to want to do?

Soros for one spent many years at an arbitrage desk building client respect, experience and qualifications before venturing out on his own.
 
Funster, you are totally missing the point. Re-read Don´s post:

¨If the traders themselves were any good, they wouldn't need to use "other peoples money" OPM, to trade with. ¨

So George Soros or Phil Cohen, etc. are not good traders? Because as Don says, if they were indeed good, why would they need other people´s money?

His comment sounds even more preposterous when you consider that he is constantly advertising his firm......which has as a selling point massive margin to trade with (up to 20X I think).

LOL.....isn´t that ¨other people´s money¨ Don?

Next he says in his post:

¨There may be a legitimate reason for starting a "fund" but I haven't heard of one yet.¨

shucks Don, I dunno! why in the world are the best minds on Wall Street walking right past Bright Trading and opening up hedge funds? Could it be that pro trading is not the end all and be all ??!?

 
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