What's a cost efficient way to PROVE your track record to eventually start hedge fund

[Swish]

I have a very good friend who historically has been a stellar trader. He has managed other folks money in a LP for about 6 years with a pretty impressive month to month track record.

Earlier this year, he had a string of losses that resulted in several problems:

1. Everybody wanted their money out immediately - which was not possible due to the longer-term positions much of the money was in and my friend's unwillingness to close out of most or all positions (LP agreement specifically gave him the authority to not be forced to close positions).

2. Folks who had been "friends" for many years turned on him, spread false rumours and gossip.

3. I've watched my friend deal with the personal fallout of the situation - Doubting himself as a trader, sleepless nights, etc.

My conclusion:

If you don't have to do it - I wouldn't mess with other people's money. In fact, I think I'd get a different job before I took on other people's money. Money velocity works well for funds for a while, but with success comes bigger amounts of money to invest and then the real problems begin!!!

 

[Dr. Zhivodka]

Quote from Swish:

2. Folks who had been "friends" for many years turned on him, spread false rumours and gossip.

Wait until friends begin suing each other.


Foz indicated above that the barriers to entry are low for Hedge Funds. I agree with this. But they're also low for a Hot Dog stand. Barrier's to entry in this case are not a what one should looking at.

The pitfall's in Managed Money are ENORMOUS. Be very careful. Do your due diligence, and then do it again.


With regard to building a track record with little or no money, have you checked with Audittrack? Frankly I don't even if they're still around. But it's worth a shot.


Dr.Zhivodka

 

[wesgttcpa]

Hello, all.

There are lots of strong opinions here and I think that many people have passed along perspectives from experience. Experience can be the best teacher.

But having the entrepreneurial drive to go out and see for yourself is a powerful force. When we are driven to explore the opportunities, the question becomes, "OK, what do I have to do?", rather than "Should I do this?"

Most of the people that call me have gotten past the "Should" question and have decided that the answer is, "Yes, I should."

This board is fantastic for getting other people's opinions. I cannot tell you whether you should do something, but if you are ready to explore a hedge fund further, there are places you can go to get help.

A couple of you have mentioned our firm and my name, and for that, I thank you!

If you want to explore the process of starting a hedge fund, search my recent postings to see a lengthy article on the topic--it is posted in five pieces.

I wish you all well.

 

[SethArb]

those real time / real money
futures trading contests or submit your track record

to a prop futures firm and hope they like you

my 2 cents .... ok back to sleep zzzz

 

[canadian_dude]

There's a lot of hedge fund talk here, and that's good, but its not exactly what my original question was all about. I will repeat it here:

Does anyone know what the costs are to run a Registered Commodity Pool versus a hedge fund start-up? I would think the Pool would be much cheaper to run?

I never said I wanted to start a hedge fund this year. All I said was that I wanted to do my best I could right now to develop the type of track record that would be respected a couple years from people with hedge fund type of money investors.

So far nobody here was addressed the issue of the Registered Commodity Pool. Is this not much easier to get off the ground than a hedge fund? Because my investors don't need to put up $50,000 minimum, I can take smaller investments of $10 K or $20 K. Those are much easier to find in the world I live in.

So maybe could address the issue of using a Pool for a couple years to develop a track record to launch a hedge fund in future years, once the Pool has proven itself.

 

[wesgttcpa]

Take a look at this publication from the NFA:
http://www.nfa.futures.org/compliance/dd2001.asp. It's lengthy, but excellent.

A registered CPO is really much the same as a hedge fund. By doing a commodities hedge fund, you get the protection of the the exemption from securities rules under Rule 506 of the Securities Act of 1933, but that may not apply to you if you are a Canadian citizen.

I do not think you will find the start-up or running expenses to be different between the pool and the hedge fund. In effect, I use the two terms interchangeably (because I think US CPOs should have the additional exemptions provided by Rule 506).

You can use whatever low limit for investor minimum that you want with either a pool or a hedge fund.

You can do an exempt pool (fewer than 15 investors with less than $400,000 in contributions from your investors). Note that the $400,000 is a newly-revised limit. See this link from the CFTC for documentation: http://www.cftc.gov/files/foia/fedreg03/foi030808a.pdf. An exempt pool can reduce your expenses and regulatory structure.

If you need to do a registered pool, you will need to join the NFA ($200 application fee and annual $1,000 membership) and take the Series 3.

Yes, there are other expenses that you need to consider. I talk on our site about how you must know what those expenses are going to be before starting down this road. I then try to give estimates of not only the set-up expenses that you will have, but also the ongoing expenses that you will likely have.

Good luck.

 

[canadian_dude]

Quote from wesgttcpa:

You can use whatever low limit for investor minimum that you want with either a pool or a hedge fund.

How can this info be correct? Everything I have ever read about hedge funds states that your investors must be contributing a MINIMUM of $50,000 each, need at least $1 million in assets, etc.

If I could take a smaller amount like $10-20 K from each investor, it would be much easier for me to raise capital. I have a lifelong friend who knows over 3000 people on a personal basis, I was thinking of offering him a partnership deal in any fund I form. The fact he is a former minister, and now works in sales for Christian radio really enhances his "trust" factor with the people he knows. I know he could raise a lot of money for a fund if he tried.

If he could get even 10% of the people he knows to put up only $10 K each, that would be $3 million in investment, and that doesn't even include the people I know, my family knows, etc.

So is this true? Can I somehow bypass this $50,000 minimum investment "sophisticated investor" requirement? Everything I read states that I cannot if its a hedge fund, even offshore funds located in Bahamas or Cayman have such minimum investment requirements.

Anyone have info on this?

 

[wesgttcpa]

There's no low limit on the investment number. Your typical hedge fund (the least expensive to prepare) can have up to 100 investors, and no more than 35 of those can be non-accredited investors.

If you accept many investors with the low limit, you start bumping up against the maximum investor limit before the fund gets large enough to support the expenses. So, yes, $50,000 is probably an appropriate low limit, but there is no requirement to that effect.

You can always waive a low limit for a special situation (friends/family/the initial investors that you want to bring into the fund to at least allow you to cover expenses).

I've tried to give you some places to go to get good, hard, data. Hope it helps.

 

[Foz]

Quote from wesgttcpa:

There's no low limit on the investment number. Your typical hedge fund (the least expensive to prepare) can have up to 100 investors, and no more than 35 of those can be non-accredited investors.

If you accept many investors with the low limit, you start bumping up against the maximum investor limit before the fund gets large enough to support the expenses.

If he relies on the 3(b)(1) exemption from the 1940 Investment Company Act he is no longer bound by the 3(c)(1) limit of 100 investors. He is trading futures and not securities.

As you say, though, he'll still be bound by the limit of 35 non-accredited investors if he wants the Reg. D exemption from registration.

 

[wesgttcpa]

Foz, that's an interesting question. I do not know the answer, and I am not an attorney. I did go and look at the law, though. It's too lengthy to post all of it. You'll want to go to this page to make sure I'm giving you a full picture: http://www.law.uc.edu/CCL/InvCoAct/sec3.html.

3(b)(1) and 3(c)(1) under the Investment Company Act of 1940 are both exemptions from the definition of an Investment Company.

We normally prepare hedge fund under 3(c)(1), which reads like this:
Any issuer whose outstanding securities (other than short-term paper) are beneficially owned by not more than one hundred persons and which is not making and does not presently propose to make a public offering of its securities. Such issuer shall be deemed to be an investment company for purposes of the limitations set forth in subparagraphs (A)(i) and (B)(i) of section 12(d)(1) [15 USCS § 80a-12(d)(1)(A)(i), (B)(i)] governing the purchase or other acquisition by such issuer of any security issued by any registered investment company and the sale of any security issued by any registered open-end investment company to any such issuer. For purposes of this paragraph:
[[[It keeps going from there--see the full code from the above link.]]]

3(b)(1) reads like this:
Any issuer primarily engaged, directly or through a wholly-owned subsidiary or subsidiaries, in a business or businesses other than that of investing, reinvesting, owning, holding, or trading in securities.

To me, the question then becomes, "What is a Security?" That definition is provided on this page: http://www.law.uc.edu/CCL/InvCoAct/sec2.html (see item 36):

Security" means any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security (including a certificate of deposit) or on any group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a "security", or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.

Without being an attorney, and just doing a "black-letter" reading of the description and not doing the further research to see if there are no-action letters and further exemptions, I do not
see how it applies.

It is an intricate area of the law, and I do not profess to know everything! So let me know if you think I'm missing something.