How to Start Your Own Hedge Fund

[CostaKapo]

hey C

interesting .........but in truth not useful for 99.9999999999999% of T2Win viewers.........how would you trade in that hedge fund ?...............viewers here like to learn how to trade

I was thinking of how this post could be relevant to the traders on this forum, and I remember a few times where someone has asked "How do I trade my friends money" or "How do I trade my relatives money"

Outside of the usual, "get their login information and trade their account" or "have them put the money in your account" no one has ever really explained the proper way to trade another individuals funds appropriately.

Clearly most people are better off doing it under the table but I think there is something to be said for taking the appropriate steps to managing someone elses money. Although it is impractical for a myriad of reasons - mostly tax purposes.

Alot of it is tax code related for the most part. Without diving into great detail, by using an LLC and an LP, the managing partners of a hedge fund's management company (the LLC) have no "individual" onus in terms of tax liability, particularly in the event of the fund's failure pursuant to non-illegal dealings. Basically, if the hedge fund goes belly up, provided it did nothing illegal, the managing partners are not deemed liable to pay for the failure out of pocket.

Additionally, there are benefits to using this structure for trading purposes (getting an IDSA, for example, or using it to manage SPVs), as some types of instruments (again, the IDSA comes to mind and so do 144A securities) have strict requirements as to who can invest in them on both a Net Worth and Savviness level. While it is less so for Net Worth, by using an LP/LLC structure, your management company can qualify for a status called QIB - Qualified Institutional Buyer - indicating that you are financially sophisticated and understand the risks of investing beyond the regular person.


That being said - as one member of WallStOasis so aptly put it -

Honest answer to starting a "small hedge fund" ... run under the table until you're big enough to not be able to hide it anymore. If you're sub seven figures, you'll be fine.

 

[louistrader]

CostaKapo, that was an excellent post. I would enjoy reading more things like this.

 

[lloydbee]

Cost Kapo

Good article. Wrong website to post on.

I disagree, and think it is very worthy of posting, beats reading some of the absolute shyte that gets posted and a daily basis. Actually it was the best read I have come across on months.

CostaKapo, that was an excellent post. I would enjoy reading more things like this.

+1, I also enjoyed reading it. My LLC I hope will be created early 2015 possibly in Nevada so this little read was of some interest.
Thanks Joe

 

[jtjudah]

I was thinking of how this post could be relevant to the traders on this forum, and I remember a few times where someone has asked "How do I trade my friends money" or "How do I trade my relatives money"

Outside of the usual, "get their login information and trade their account" or "have them put the money in your account" no one has ever really explained the proper way to trade another individuals funds appropriately.

Clearly most people are better off doing it under the table but I think there is something to be said for taking the appropriate steps to managing someone elses money. Although it is impractical for a myriad of reasons - mostly tax purposes.

Alot of it is tax code related for the most part. Without diving into great detail, by using an LLC and an LP, the managing partners of a hedge fund's management company (the LLC) have no "individual" onus in terms of tax liability, particularly in the event of the fund's failure pursuant to non-illegal dealings. Basically, if the hedge fund goes belly up, provided it did nothing illegal, the managing partners are not deemed liable to pay for the failure out of pocket.

Additionally, there are benefits to using this structure for trading purposes (getting an IDSA, for example, or using it to manage SPVs), as some types of instruments (again, the IDSA comes to mind and so do 144A securities) have strict requirements as to who can invest in them on both a Net Worth and Savviness level. While it is less so for Net Worth, by using an LP/LLC structure, your management company can qualify for a status called QIB - Qualified Institutional Buyer - indicating that you are financially sophisticated and understand the risks of investing beyond the regular person.


That being said - as one member of WallStOasis so aptly put it -

Thanks for the post CostaKapo. Good info.

 

[Hittfeld]

CostaKapo, that was an excellent post. I would enjoy reading more things like this.

And so would I. Thanks CostaKapo!!

Kind regards

 

[hucks]

Great post, very informative! :clap:

 

[lloydbee]

So what is the best way to get a LLC up and running?
Is it worth using a service and take the gamble they don't hide things or later popup the hidden charges of items needed or is it really easily done online? any thoughts as it is time...

 

[drtro]

Is it possible to have an account with a broker for each investor and then you trade/invest from one account that pools money from all?

Like say you have your main account you trade/buy/sell securities with.

Your Mom invests $100K and you put it in account A.
Your Friend invests $100K and you put it in account B.

You buy $50K worth of stock ABC. It takes $25K from account B and $25K from account B, so it distributes it among accounts.

 

[Jack o'Clubs]

As someone has posted similarly on another thread, Interactive Brokers have 'Friends and Family' account structures for fewer than 15 ' clients' (which is generally free from regulation).

 

[hhiusa]

The best and cheapest way to start a hedge fund is in the Cayman Islands. Many Hedge funds are actually based there. See below for details on Cayman Islands Monetary Authority

The Cayman Islands: A Guide For Hedge Fund Managers.
http://www.mourantozannes.com/media/452717/the_cayman_islands_a_guide_for_hedge_fund_managers.pdf
I fairly certain it is about CI$42,000 after everything is finalised and licenses are granted excluding the minimum capitalisation.

http://www.cimoney.com.ky/regulated_sectors/reg_sec.aspx?id=96

The MFL (section 4(1)) specifies that a mutual fund operating in and from the Cayman Islands must have a licence unless: a licensed mutual fund administrator is providing its principal office; it meets the criteria set out in section 4(3), which allows for funds to be registered, or it is exempt from regulation under section 4(4).

Cayman Islands Funds Law 2013
http://www.cimoney.com.ky/WorkArea/DownloadAsset.aspx?id=2147484126

According to CIMA there are three types of Regulated Funds

Licensed Mutual Fund​

Administered Mutual Fund​

Registered Mutual Fund​

minimum aggregate equity interest of CI$80,000 (US$100,000) purchasable by a prospective investor or the equity interests must be listed on a stock exchange approved by CIMA.​

Common Fund Vehicles

Exempted Company​

The exempted company may redeem or purchase its own shares and may therefore operate as an open-ended corporate fund​

These will be the easiest to form and only around $3,500 to incorporate excluding your CIMA license.​

Segregated Portfolio Company​

An exempted company can also be established as a "Segregated Portfolio Company" ("SPC") with protected cells or portfolios. The SPC makes it possible to provide a means for different groups to protect their assets when carrying on business through a single legal entity. This is like having several exempted companies in one company.​

Unit Trust​

The unit trust is usually established under a trust deed with the investors' interest held as trust units.​

I hear these are especially popular for those dealing with the Asian markets. You could also form a STAR trust but they have a more specific purpose and cannot conduct business beyond the scope of that purpose once established.​

Exempted Limited Partnership​

The exempted and limited partnership provides a second unincorporated vehicle and it can be formed as easily as the exempted company or the unit trust​

Here is a fees list from the Cayman Islands government for licensure and maintenance of corporate vehicle.
http://www.cimoney.com.ky/WorkArea/DownloadAsset.aspx?id=2147484126

 

[ctpelot]

Good post. Thank you

 

[CostaKapo]

So what is the best way to get a LLC up and running?
Is it worth using a service and take the gamble they don't hide things or later popup the hidden charges of items needed or is it really easily done online? any thoughts as it is time...

Can't go wrong with legalzoom TBH.

I personally have registered C Corps and LLC's in the state of Maryland so I am very familiar with the process by now. I had to file a Foreign Corporation charter in PA for my MD Corporation that does business in PA.

They are all very very easy IMHO. Using an entity to do it for you usually expedites the process though.

 

[hhiusa]

I would disagree with using legalzoom, especially if the purpose is to start an investment firm or hedge fund.

 

[CostaKapo]

I would disagree with using legalzoom, especially if the purpose is to start an investment firm or hedge fund.

Its a perfectly fine resource to use to register an LLC.

 

[Uranus]

Is it possible to start a CTA with your own money as 100% of the AUM or do you need other investors?

 

[silverkas]

http://www.trade2win.com/boards/general-trading-chat/225334-if-you-want-start-hedge-fund.html

 

[silverkas]

link above for anyone who needs help with setting up