Starting a Hedge Fund

another more interesting option offered by some introducing / second-tier prime brokers is, since they normally have the infrastructure to deal with retail (whereas the primes are usually less well equipped if you aren't institutional-type), they let you use as much leverage as you can 'justify' (usually x times higher than one would get from a prime) to block trade as much as you want, and allocate P&L to your client accts on an equity pro-rata weightings-basis. whats the catch? well, there is no catch, they'll just charge you higher comms (ie theirs on top of the prime's), negotiable as usual based on volume etc...

thats the set-up i have in place - am trading the forex essentially, getting 1% leverage instead of 3% at a prime -, much more cost & tax-effective overall for all stakeholders than setting up a fund, from all the research i have done... just food for thought ;-)
 
Quote from Don Bright:

....if you trade with a few million every day, and make money, wouldn't it make sense to trade where you can keep all the money rather than have to split it with the investors. As you are well aware, our traders (and those of other firms) can do that. That is all I meant....
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OK, simple question Don,

If we have a profitable system, would your firm give us money to trade and then split the profits?

Example: We fund an account with 25K and you add an additional 75K. We trade the 100K and make 10K profit (10% on the 100K) and we each take home 5K (Splitting the profits?)?

Is this how prop trading works? Are draw downs dealt with in the same manner? If so, this is a great deal! HF's typically take home only 20% of profits, not 50%.... or am I missing something?

Granville
 
Thanks "JoeTrader". I'm glad to hear there are many "introducing Prime Brokers" for little guys like me. What are the names of some of these guys? (those who are "good"). What is there actual role?
 
Quote from Don Bright:

Well, good...a "spirtied debate" from an anonymous name caller. How about we have a real discussion, perhaps on my radio show or here on elite...I'm sure Baron would welcome it...nothing radical, just adults speaking...I'll bring on a few of my traders who opted not to borrow OPM (or did for a short time, paid it back, and went on their own)...let them carry the ball...and perhaps, just perhaps, they weill explain how they are very thankful to borrow $millions, on a daily basis, for free.....and not have to be accountable to friends and family for a few bucks.

Any takers....(and, before we get "too real" - be sure to note the comments I made about "legitimate" hedge funds (over $30 mil, I think is the registration $$ amount)....

Should make for some interesting dialogue, if we can get past the silliness.

Let me know.....I'll set it up....

(Oh, and of course, those with a few million to trade with, can take part in the strategies that actually work to make a good living)....Pairs, Openings, M&A, as you all know, take some capital.

Remember, my brother and I were on the "other side" for a long time. Back in the 70's and 80's, we put up $50K or so, and used Spear Leads money (now Goldman Sachs) to trade with. So we "practiced what we preached" and became pretty successful doing so....No "ivory towers" here...just reality....and you can check the website for the continued "trading success" (vs. trading firm success).

www/stocktrading.com/trader10030.html (for example).

(for those who know me well, this response is a bit out oc character, but you all ask how I take the silly comments so well, without "lashing out"....this is all being done with a smile, and stay tuned, this may be fun).

Have fun everyone.....off to the radio show...

Don

Don:D
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Mr. Bright,

Not anly "anonymous callers" think like this, but most industry professionals do, and I think it is a shame to make such statements in public and discuss basic fundamentals of whole industry.

I understand that you are aware of the fact, that CFTC has taken serious issue with CTAs compiling performance based on the results of their own trading. This proofs that managing OPM is not what you think or what you want to be.
 
joetrader,

I understand what you are saying about the difficulty raising funds, but I have some questions.

Ten years ago, HFs were far fewer in number and were far less accepted by the mainstream. Access and acceptance by wealthy individuals was less common and trusts/endowments rarely dove in with conviction. Given that things are so different today, do you think the next 10 years would be as difficult as the last 10 for a guy averaging 30% - similar to the one you met?

If this guy has 400m and is doing 30% a year... and let's say he's charging 2/20... that would be a gross of 32m a year. What sort of expenses would he typically have at that level? Let's say he had 4 key guys who he paid 1M a year and say 10 others who totalled another 2M in compensation. Throw in 1M a year for audits and accounting and maybe a plush office for another 1M and let's say 1M for legal. I think some of these numbers might be high, but even at this level the firm is making 23M pretax after everyone is paid. Am I missing anything?

I know there seems to be this standard accepted definition of "big" in the industry, but I must be missing something. It would seem like 23M would be plenty of jake if you're banking some and not buying a new G5 every other year. I would rather close at 400m while able to continue the 30% and keep a line at the door vs. going up to 2-3B and watering down the return. Not to mention that 30% is likely AFTER fees, so his 32m would really be about 38m as he would be returning closer to 40% before fees.

Also, why not take a few hundred K and pay a marketing guy or two to work exclusively for his firm?

Nice post by the way!!!

thanks

ktm
 
Quote from NoFixedAddress:

Thank you Rufus, This is helpful. Do you know if BofA housed any super small funds just starting out <5MM??
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At least they used to, when I was there, but that's 6-7 years ago now, the landscape clearly has changed, we were around $150M, and we were probably the biggest in their NY presence. I would think 10MM would be the start off point now.
 
Quote from granville:

OK, simple question Don,

If we have a profitable system, would your firm give us money to trade and then split the profits?

Example: We fund an account with 25K and you add an additional 75K. We trade the 100K and make 10K profit (10% on the 100K) and we each take home 5K (Splitting the profits?)?

Is this how prop trading works? Are draw downs dealt with in the same manner? If so, this is a great deal! HF's typically take home only 20% of profits, not 50%.... or am I missing something?

Granville
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How about you put up the $25K and keep all the profits as all of our other traders do? This is the point that I'm trying to make. We do provide capital to those who trade well.

You keep all the profits, and are responsible for losses, just like any other business (trading or not). We provide capital and make a portion of your commissions...pretty basic.

Feel free to call to discuss.

Don 702.739.1393
 
Banc of America looks for accounts of 10 million. They will make exceptions (say you have 7 with a real prospect of getting to 10 quickly). It is a tough game for the smaller funds, you are probably better off using an intro broker to one of the big houses.
 
This whole hedge fund v. prop shop is a silly argument.

In a prop shop you get amazing INTRADAY leverage so that $50,000 gets you like $2,000,000 in intraday buying power but you assume that all hedge funds are daytraders. How can you compare the two? This is almost a childish debate. If you want to daytrade stocks or futures yourself then a prop seems fine. If you want to manage money in large amounts and NOT daytrade, I see no reason to accept any argument for prop as anything but a biased point of view. UNless you tell me that a person can get 40:1 overnight.

If I can raise $3,000,000 in funds for a hedge fund and put in my $50,000, I can charge 1.5% management fee ($45,000) and 20% of profits. Assume a nice 15% return for the year, that gives me an extra $90,000 for a total income of $135,000. I can hold positions overnight, monthly, yearly do whatever I want. This is not daytrading. Not to mention on top of that my $50,000 is increased by 15% and continues to grow.

So to argue prop v. hedge funds without qualifying the type of trading to be done is silly. All due respect to the prop shop proponents here, if someone can raise funds and is not daytrading, what good is intraday leverage or even 4:1 overnight leverage with debit interest charges?

Hedge funds are good if you raise millions to manage and take a huge fee. Has nothing to do with prop shops.

Even with option trading, the risk-based haircut gives you some advantages but if you can raise $3,000,000 and manage it, why not do that instead of taking your $50,000 to an option prop. Of course it is not to say you cannot take your hedge fund to a prop shop and get the best of both worlds.

I think it is up to the individual to determine what is best for them then to make blanket statements that it is silly to start a hedge fund, you should always go prop.
 
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