Tiny Hedge Fund Startup Questions

Quote from HornedGod:

Quoted from the <a href="http://www.capitalmanagementlaw.com/index.html">Capital Management</a> website, who also seem to specialize in setting up forex funds and hedge funds. Their incubator hedge fund seems like a good way of getting a track record without incurring expensive accounts costs initially (especially if you're not looking for investors off the bat).
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Look good for start-up funds. Thanks.


Quote from ptunic:

Thanks for the info-- I'll look into it in more detail but that appears very promising at first glance.

-Taric
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If you have more info about the cost (initial, and operating cost), can you share with us?
 
I also noticed that one of the author's of the the .pdf linked in the first post in this thread (the Currency Trader article) is Hannah Terhune, who is now the main attorney at Capital Management. I can only guess that she used to work for Green Company but left to start her own trader tax company.

There is additional info about <a href="http://www.greencompany.com/HedgeFunds/HedgeFundIncubatorFunds.shtml">incubator funds</a> on the Green Company website. Their page has a link to a more detailed price breakdown.
 
Quote from yip1997:
If you have more info about the cost (initial, and operating cost), can you share with us?
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I'm still researching these issues. I spoke with several accounting firms, so far they have all seemed very professional. Here are various cost scenarios (very rough approximates only, in many cases quotes were given to me in a wide range):

Initial formation: $5000 one time expense

-or- Initial formation: $1000 if you do most of the work yourself and use an online registeration service; you come up with many of the documents yourself which takes lots of time, might run into securities law issues if you misstep


Accounting/compliance: $4000/year
Auditing: I've been quoted between $4000-$20000/year, for highly professional auditing
State registration: $800/year (in CA at least), not sure if this is needed

NFA registration etc is about $750/year and also requires a Series 3 license. NFA registration is not necessary if total contributions are $400k or less and the fund has 15 or fewer outside investors, or if the fund is purely spot forex.

You can do accounting yourself if you are willing to learn it and spent time doing all of it. That can reduce accounting costs from $4k/year to say $1k/year for software/consulting etc.

An incubator fund cuts the startup costs roughly in half by deferring lots of that work until you have investors. So it can spread the costs around.

I'm still thinking about all of these issues, I'm leaning on doing the accounting and initial formation myself, and initially starting without NFA or auditing. However I might get a (cheaper) kind of independent accountant review/validation, but that does not qualify as an audit in the technical sense as is required by most databases etc. So a possible plan is to establish and start trading through the fund for a year without any outside investors, with minimal (if any) audit. After a year, if things are going well attempt to raise funds from some personally known potential investors who don't care about audits since they know me. If things are still going well by year 2 and enough investors have come on board, at that point get the full audit, perhaps also start outsourcing more accounting etc, and start listing in some of the main databases etc.

I am by no means an expert on this and much of my information might be wrong, but hope it is useful in some capacity.

Happy holidays,
-Taric
 
Thanks for the info Taric..... I'm going through the same process right not trying to figure out what the initial costs would be to get a small fund going. I've done some reading about the 'incubator' fund that Green Trader Tax offers, and I agree that the auditing could probably be put off until just before a formal offering to investors is made.

The thing that I've been chewing on is it worth it to spend 10-15% of my capital on these services over the next 2 or so years to build up a formal track record? Or is it better to stay a 'private' trader where my costs are minimal. The upside money-wise is better going the hedge fund route, but I'm also trying to take into account quality of life type issues as well, and just wondering how much more stressful life becomes managing other people money.

Any thoughts on this?

-rob
 
My understanding is that [non institutional] clients call every day - were we in on this, how the hell could we have missed that? etc.
 
As someone with an LP for > 10 years and managing a small 7 figure hedge fund...

Forget about do-it-yourself anything for 2 reasons:

(1) Saving a few thousand in legal or accounting advice is INSANE in the long run.
For example...
You will become an IRS Audit Magnet... if you are rolling your own books.
In contrast... if you are using a reputable accounting firm... the IRS will not waste time on you.

(2) Most accountants DO NOT do Audits.
They are simple bean counters...
And will not expose themselves to the RISK of being responsible for an Audit.

Financial statements produced by a 3rd party Accounting Firm are an absolute minimum for about 3K/year.
But a full Audit for about 5-7K/year gives you MUCH more credibility...
Because the firm actually takes responsibility for accuracy...
By asking a lot of questions, etc.

Do yourself a BIG favor.

Run your business as professionally as possible... as soon as possible.
Get GOOD professional legal and accounting advice...
Never hire cheap lawyers/accountants... pay more and get the top guys.

Also have a professional, ** interesting ** web site.

If I had not been following the above advice...
There is NO WAY that I would have a successful business today...

IT IS SO EASY TO GO OUT OF BUSINESS... it happens every day to 1000s of people.

PS: The most expensive thing and biggest ripoff is anything regarding "regulatory compliance"...
That you will have to do in house... or get taken to the cleaners.
You will have to become an expert in the regulations YOU are subject to.

PPS: That Law Firm web site posted looks OK. Use someone like that... ** EXPERIENCED **
 
Interesting posts but seems the administrator's costs are missing in this picture?...

i cld be mistaken but don't think anyone wld want to invest even $20K in a fund whatever the structure is and how great the manager, that hasn't appointed an independent and reputable fund administrator http://www.citco.com/funds/library/2003_Leahy.pdf (eg, just googled that, but just for illustration purposes, citco being an ok reference)

and thats not cheap...
 
I dunno.

I get calls from people asking what 2/20 means. Then they ask how a hedge fund works.

These people are accredited, however they have spent the better part of their lives in mutual funds and are curious.

It surprises me how some will write a check in a second and others take months and get all the answers they want and fret over not getting in. I think most of the decision to invest is made on gut feel about the manager and not so much based on static requirements.

I'm referring to HNWs investing in tiny funds, not bigger operations or institutional investors.
 
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