Starting a Hedge Fund

I don't know about the HG. Each time I start thinking I have found something, the market corrects me. I have employed a number of strategies over the years that have proved successful. It seems to me that 4 or 5 key trading methods are all that I've required. The hard part is knowing which one to use and when. I like to think I listen to the markets, much like many successful daytraders only on a much longer timeframe. Lately, the market wants clean accounting, before that it was low debt, before that it was a more solid balance sheet.

I use a lot of derivatives. Over the past year, I have worked with a few friends and they have adopted some of the same prinicples I use and traded in the same manner. It's not a system or anything concrete...it's more an ongoing dialogue similar to discussions had by economists and other market watchers. Much of what I do is contrary to that which is espoused by most top daytraders. Other elements are consistent with their philosophy. Back in the eighties, I used to trade behind the greenmailers before the SEC banned greenmailing. I've been trading for almost 15 years now. I have nothing left to prove to myself. The topic of investing has come up at parties and such and I have made some suggestions to a few friends about stocks to look at or buy. I give the usual disclaimers but after a few winners, somebody comes back to me and wants to pay me to manage some of their money. After turning people down for years, I finally realized that I was cutting myself short. Pooling is just a way to make things EASIER for me to do this in one account.
 
... from what I understand, what you propose is a violation of securities laws. A lawyer told me that many investment clubs are likely in violation because they really only have one decision maker for trades. I believe the key is who makes decisions, not if there is consensus or not.
 
Agreed - if all partners do not make the decision to invest partnership funds in a particular way, and only a limited number of partners have that decision making authority, then it's a hedge fund, not an investment club.

The typical investment club discusses individual stocks to invest in, pros, cons, fundamental analysis, etc. But does the decision necessarily have to be centered around a particular stock, or can there be a decision to invest strictly based on a clearly defined method? KTM seems to have an investment method or approach that could be clearly articulated to club members. If this were the case, and all club members made the *decision* to invest according to that method, is it valid to argue that all partners actively participated in making the decision to invest in the stocks that the method "picked", and therefore, the partnership could be considered an investment club?

This seems analogous to an investment club's partners deciding to invest in a mutual fund. The partners decide that the mutual fund's investment method is appropriate, but they don't actually control the composition of the fund, timing of buying/selling of stocks into the fund, etc.

Thoughts?
 
The difference between an investment club and a hedge fund is that investment clubs are usually general partnerships and hedge funds are usually limited partnerships or limited liability companies. There is no law that I know of prohibiting any of these three types of business entities from engaging in securities trading as their primary business. There are certainly specific laws that _regulate_ investment clubs and hedge funds (no broadcast advertising, for example) but not that prohibit one structure or another.

An advantage of investing through a hedge fund is the limited liability. An advantage of investing through an investment club is the opportunity to take an active role in the management of the partnership. There are also tax consequences for US investors depending on whether they are active or passive investors.

Did your CPA say what specific laws he thinks some investment clubs are guity of violating?

Aaron Schindler
Schindler Trading
 
investment clubs are clubs where decisions are made by the club, cannot be compensated in a iclub, unless youre registered and if youre registered why are you running a iclub?
 
Not sure what in your reply was directed at me. However, there is more of a difference between a hf and an iclub than you point out. I don't believe I even addressed structure in my previous post.

It was a lawyer, not a CPA, that told me that with a hedge fund (LLC, LP) you are in effect selling security interests, so a person starting one must work through a number of exemptions. This is my understanding anyway.

>>>The difference between an investment club and a hedge fund is that investment clubs are usually general partnerships and hedge funds are usually limited partnerships or limited liability companies. There is no law that I know of prohibiting any of these three types of business entities from engaging in securities trading as their primary business. There are certainly specific laws that _regulate_ investment clubs and hedge funds (no broadcast advertising, for example) but not that prohibit one structure or another.

An advantage of investing through a hedge fund is the limited liability. An advantage of investing through an investment club is the opportunity to take an active role in the management of the partnership. There are also tax consequences for US investors depending on whether they are active or passive investors.

Did your CPA say what specific laws he thinks some investment clubs are guity of violating?

Aaron Schindler
Schindler Trading<<<
 
iclub and OPM.
[Q]
or can there be a decision to invest strictly based on a clearly defined method?
[/Q]

I think this could be a way to do it for your close friends and family. I don't know how it works in the US but here in Austria you can do it this way but you are not allowed to charge any fee for anything. :(

The club can define a person who pull the trigger for the iclub portfolio but he has to do it for free.

It's very important that the memeber has made his own independent decision to invest in this trading strategy.

And there can be problems if you make any decisions beside the strategy. If you do so you always has to ask all the members. Could be stressful if you wanna go out AMZN now cause the future is falling like a stone and you have to phone 20 people first :)

Annyway people are your friend and you can do near anything like handshake as long as you are over water, making money. The problems comes if you fall in a draw down and that's part of the business.

But how about an offshore LLC on cayman bahamas or jersey? I know you are not allowed to take US clients but what are the other problems that could happened?

Pros and cons for offshor?
Accounting, bank secure, tax?????


thx for this thread

Dan
 
Hello, all. I realize this thread has been resurrected, but maybe some of you are still subscribed and will find the information in this and the next several posts to be of value. Good luck on starting your hedge fund!

Starting a Hedge Fund


Are you ready to “run” other people’s money? How do you set it up? Is there any money in it for you? How much regulatory hassle will there be? Hedge fund are hot. The profits have been exceeding the mutual funds’ and the broad averages. And there’s more good news. You can set up your own hedge fund for under $10,000.

Hedge Fund = Security (but not a security blanket!)

At its most basic level, a hedge fund is the pooling of investments from multiple individuals into a single brokerage account. The hedge fund manager attempts to achieve investment results in that match the objective of the hedge fund, rather than the objective of any of the individual investors.

The SEC treats a hedge fund as a security. Securities are regulated under Regulation D of the Securities Act of 1933. But there is an exemption that will allow you to make a private placement of your hedge fund without having to register the security with the SEC. The attorneys that create your offering documents will ensure that the disclosures in the documents will allow you to achieve this exemption. The exemption is great news and all the states honor this exemption from registration.

You want that exemption, and you probably want to form what is known as a Section 3(c)(1) fund (from the Investment Company Act of 1940). That kind of a fund allows you to have fewer than 100 investors, of whom up to 35 can be non-accredited investors.

A typical hedge fund manager has only one client—the hedge fund. The individuals that buy into the hedge fund are the investors.

You will want to make certain that an attorney is actively involved in the set-up of your hedge fund. The laws are convoluted, but it is critical that you follow them to keep yourself out of trouble! The author is a CPA and not an attorney. This allows our clients to get the best of all worlds, since our attorney is actively involved in the review of all legal issues.
 
Pool or Fund?

If you trade commodities or futures in your hedge fund, you will probably need to set up a Commodities Pool that is registered with the National Futures Association (NFA). The Commodity Futures Trading Commission has delegated most of its day-to-day regulatory duties to the NFA. There are a number of additional regulations associated with Commodity Pools, but they can be handled with no problem.

There are three exemptions that allow you to make futures and commodities trades in your hedge fund without requiring that you register with the NFA, or at least reduce your regulatory oversight. There’s one that allows you to not have to register with the NFA (or be subject to the CFTC’s rules) if the aggregate initial margin and premiums never exceed 10% of the fair market value of the fund’s assets. There are caveats to that exemption, so be careful in this area!

If you have a very small commodities pool (where the total amount of the investments into the pool never exceeds $200,000), you can also be exempt form registration with the NFA. The pool can grow to over $200,000 without having to register; it is just that the initial investments cannot exceed that level. Again, there are other requirements to be able to meet the exemption, so use caution.

The third exemption requires that you register with the NFA (and take the Series 3 Commodities exam), but it significantly reduces your regulatory oversight from the NFA/CFTC. This exemption requires that all of the investors in the pool meet a standard of wealth called Qualified Eligible Person—basically, they need to have $1 million of net assets and own securities with an aggregate market value of at least $2 million. If your investors meet that standard, you can cut down on the regulatory burden.

Offshore hedge funds, Master/Feeder structures, and funds of funds are all other types of hedge funds. We will save a discussion on those types of funds for a future article.

What does the hedge fund manager get out of the deal?

Over the past several years (other than the last couple), the economy has created more individuals that meet the criteria for investment in a hedge fund. A hedge fund investor needs to be a sophisticated investor that understands the risks associated with the fund. Since more people are eligible, the media has identified to the general population that hedge funds are both performing well and are available to individuals. Your prospective investors may just be waiting to have someone ask them to invest in a hedge fund.

The income that can accrue to the hedge fund manager can be substantial. Let's assume that you have $2 million under management and your hedge fund has a 1 percent management fee and a 20 percent performance allocation. We will also assume that started the fund in the first day of the year and that you had performance in the fund of 30 percent.

The hedge fund manager under these assumptions would have gross income of $140,000. That is made up of a $20,000 management fee ($2 million x 1%) and a $120,000 performance allocation ($2 million x 30% performance = $600,000 x 20%). A hedge fund with $5 million under management and all of the same assumptions from above would generate $350,000 of income for the hedge fund manager.

Plus, you probably have a significant portion of your own money invested in your hedge fund. Your prospective investors will like to see that you are putting your won money into the fund. You don’t charge yourself fees (it would just increase your taxes), so you earned the 30% that you gained for the fund on your own investment in addition to your other income.

Is This Another 12-Step Program?

The formation of a hedge fund is actually very easy, if you have the right provider on your team. See part 5 of 5 of these posts for the 12 steps involved, and then come back to here and continue reading for additional information.
 
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