Starting a Hedge Fund

maxross · Jan 19, 2006

quick question, does anyone know if you can start a hedge fund for some friends and family (with a few million dollars) made up of mostly IRA funds. Not sure if there are any ERISA laws??

Thanks!

TruthTeller · Jan 19, 2006

Quote from maxross:

quick question, does anyone know if you can start a hedge fund for some friends and family (with a few million dollars) made up of mostly IRA funds. Not sure if there are any ERISA laws??

Thanks!

Some states require you to deal only with "accredited investors". In my research, so long as you and your investors are within state guidelines, whatever they may be, funds can come from any source. But check with a qualified lawyer.

And, it is likely that if you are managing IRA funds, you'll have another few hundred pages of forms to complete with the regulators.

Really sure you want to trade/invest retirement funds for family members? You'd better be darn good!

lynx2004 · Jan 19, 2006

Quote from maxross:

quick question, does anyone know if you can start a hedge fund for some friends and family (with a few million dollars) made up of mostly IRA funds. Not sure if there are any ERISA laws??

Thanks!

my understanding is that if Retirement funds become more than 25% of the fund, then ERISA regs will make it harder.

Also if you trade futures, ira accts need to find a custodian who takes alternate investments.

I'm no expert in this subject so pl. check w/ a lawyer and would like to hear what you find.

best wishes.

ktm · Jan 19, 2006

Quote from lynx2004:

Congatulations!!

If you don't mind me asking, what structure do you have? LLC as the GP (you) managing the LP Fund? And do you have another LLC receiving the mgmt fee?

The LLC mgmt co manages the LLC fund.

rjv27 · Jan 21, 2006

ktm

I worked at one of the largest prime brokers, and now I'm a prop trader. FYI - 90% of the domestic hedge funds that I set up had the legal structure of:

1. Main Trading Fund was an LP
2. General Partner was an LLC
3. You and your partner would be the Managing Member of the LLC

rjv

ryank · Jan 21, 2006

Quote from rjv27:

1. Main Trading Fund was an LP
2. General Partner was an LLC
3. You and your partner would be the Managing Member of the LLC

rjv

Why is LP the preferred way to go? It must have some advantage but I'm not sure what it is.

ryan

lynx2004 · Jan 21, 2006

Quote from rjv27:

ktm

I worked at one of the largest prime brokers, and now I'm a prop trader. FYI - 90% of the domestic hedge funds that I set up had the legal structure of:

1. Main Trading Fund was an LP
2. General Partner was an LLC
3. You and your partner would be the Managing Member of the LLC

rjv

I also have seen a number of structures where there is another separate LLC entity which receives the management fee (this Advisors LLC is also owned by the hedge fund manager)-- must be some sort of separation of management fees and incentive fees.

ChrisM · Jan 22, 2006

Quote from Don Bright:

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 hope I am dreaming, talking about fundamentals.

This means that Buffett, Soros and others promote just bunch of BS and prop firms are only solutions ? Gimme` break, sir, wrong address for your revolution.

formikatrading · Jan 22, 2006

Technically, the LP structure doesn't have any advantage over an LLC except for (1) familiarity of investors in that structure; (2) more established legal history for that structure; and (3) many old trusts that were formed long ago that may invest in a hedge fund didn't authorize investments in LLCs because they didn't exist.

Quote from ryank:

Why is LP the preferred way to go? It must have some advantage but I'm not sure what it is.

ryan

Lights · Jan 22, 2006

hedge fund and pro firm are two completely different things.

hedge fund = put up nothing, get $100 million from investors, make 1-2% mgmt fee = $2million a year and then a 20-30% performance bonus = $4 million if you're good. trade futures, commodities, currencies, equities, intl' markets.

pro firm = put up money and mostly daytrade nyse stocks. occasionally hold overnight + swing until get pressured to close your position. structure of pro firm coerces traders to book quick profits since firm's bottom line comes from trader's booking (commission), and not the trader profitability. also, lose money, put up more of your money.

most pro firms don't even have $20million in capitalization yet they give leverage to 200+ traders.