I am researching starting a tiny hedge fund. Initial AOM would be just my contribution of 50k. While low, that is high enough to list on a few of the databases for performance after 1 year of audits. This is exclusively trading spot forex with an average hold time per trade of 3 days. The business structure I'm leaning on is an LLC for the management company that receives fees from an LLC that contains the funds that will be traded with Oanda. I have various questions, thanks for any replies in advance:
1. According to the March 2005 article http://www.goforex.net/Setting_Up_Forex_Funds.pdf , "Spot forex trading is not regulated
by the CFTC and does not require CPO registration if the fund trades spot currencies exclusively". I believe this means initially I would not have to register with the CFTC or NFA unless required by the databases. Is the article accurate about registration being optional for spot forex funds?
2. If in addition to managing the fund, if I also place trades directly in some clients' accounts (eg CTA style), then at that point is registration required? Also, I would assume you put trades for direct client funds after (eg with worse fills) the trades you make for the fund?
3. I have seen various references that if the fund hits $400,000 AUM (used to be $200,000 a few years ago), then that triggers a much larger amount of accounting issues that can increase cost. Can anyone be specific about what is required here? I already will have auditing in place. Are there new registrations and fees required at this point?
4. Typically, funds have to account monthly. If I want to let investors add or remove funds any month, but there are open positions in process, is this something that can easily be accounted for? Do I have to close positions and re-open them based on the current capital if that makes sense? It would be much easier for me to allow new capital contributions/withdrawals once a month, but only during the first weekend of each month. The problem there is the databases (and government I believe) require monthly accounting to begin on the 1st. How are these open position issues typically handled? I feel I might be overcomplicating this somehow.
5. Trading is not my full-time job. I plan on address this by adding a section under additional risks and also under conflicts of interest. I think this is a bit unusual but not illegal, particularly if well disclosed. ?
6. I'm considering adding an equity kicker for initial investors (a separate class). Eg the first million of capital also comes with a a stake in the management company (future fees), however that class of investors is required to invest long-term to get that advantage. This is pretty unusual, and obviously reduces my future compensation percentage, but perhaps the advantage of being easier to raise initial capital would outweigh the disadvantages. Any thoughts on this?
-Taric
1. According to the March 2005 article http://www.goforex.net/Setting_Up_Forex_Funds.pdf , "Spot forex trading is not regulated
by the CFTC and does not require CPO registration if the fund trades spot currencies exclusively". I believe this means initially I would not have to register with the CFTC or NFA unless required by the databases. Is the article accurate about registration being optional for spot forex funds?
2. If in addition to managing the fund, if I also place trades directly in some clients' accounts (eg CTA style), then at that point is registration required? Also, I would assume you put trades for direct client funds after (eg with worse fills) the trades you make for the fund?
3. I have seen various references that if the fund hits $400,000 AUM (used to be $200,000 a few years ago), then that triggers a much larger amount of accounting issues that can increase cost. Can anyone be specific about what is required here? I already will have auditing in place. Are there new registrations and fees required at this point?
4. Typically, funds have to account monthly. If I want to let investors add or remove funds any month, but there are open positions in process, is this something that can easily be accounted for? Do I have to close positions and re-open them based on the current capital if that makes sense? It would be much easier for me to allow new capital contributions/withdrawals once a month, but only during the first weekend of each month. The problem there is the databases (and government I believe) require monthly accounting to begin on the 1st. How are these open position issues typically handled? I feel I might be overcomplicating this somehow.
5. Trading is not my full-time job. I plan on address this by adding a section under additional risks and also under conflicts of interest. I think this is a bit unusual but not illegal, particularly if well disclosed. ?
6. I'm considering adding an equity kicker for initial investors (a separate class). Eg the first million of capital also comes with a a stake in the management company (future fees), however that class of investors is required to invest long-term to get that advantage. This is pretty unusual, and obviously reduces my future compensation percentage, but perhaps the advantage of being easier to raise initial capital would outweigh the disadvantages. Any thoughts on this?
-Taric
