Trading other people's money

[BSD]

Regulation:
Getting regulated by the FSA is a long and expensive journey.
Forex or spot is not classed as an investment instrument by SOME Fin Reg bodies. This may mean you could trade someones account by a limited power of attorney without been regulated, but........... your company would still need to be approved by the Fin Reg!

Hi Captain,

yes, thanks, got that, just a bit unsure on the "may mean" part, imo if one goes down the route of trading OPM the best way would be to tie up all ends without any maybes, so that you could just keep growing if that's what you're after without having to worry about any loose ends later on when you wish you'd set it up properly from the outset, eg when you could be getting investment offers but aren't beccause you're not set up profesionally enough.

EG in the US apparently paying a legal firm US$ 10K and auditors after a year or so US$ 7 K takes care of all that needs to be taken care of and you've a hedge fund that can attract clients, is that possible here as well or are the hassle / costs greater ?

 

[Captain Currency]

Hi Captain,

yes, thanks, got that, just a bit unsure on the "may mean" part, imo if one goes down the route of trading OPM the best way would be to tie up all ends without any maybes, so that you could just keep growing if that's what you're after without having to worry about any loose ends later on when you wish you'd set it up properly from the outset, eg when you could be getting investment offers but aren't beccause you're not set up profesionally enough.

EG in the US apparently paying a legal firm US$ 10K and auditors after a year or so US$ 7 K takes care of all that needs to be taken care of and you've a hedge fund that can attract clients, is that possible here as well or are the hassle / costs greater ?

Hello again BSD,

It would be certainely nice if you could pay a company a fixed amount to do all the leg work for you and set a company up.

What Im saying when I say "may mean" Depending on what country you are in, The Fin Reg for that country may differ from the Fin Reg of another country. So obvisouly you have to comply with the Fin Reg for your own country. Confuse yet?

I should have said it more clearly, let me try again: Forex or spot is not classed as an investment instrument by SOME Fin Reg bodies. Therefore, depending on which country you are conducting your business from and whoever the Fin Reg is for that country, this may mean you could trade someones account by a limited power of attorney without been regulated, but........... your company would still need to be approved by the Fin Reg!



Kind Regards,

 

[Jack o'Clubs]

ScotchHarry,

Can I suggest you go back and read Grantx's post, as that is the way forward with minimum hassle.

 

[BSD]

What Im saying when I say "may mean" Depending on what country you are in, The Fin Reg for that country may differ from the Fin Reg of another country. So obvisouly you have to comply with the Fin Reg for your own country. Confuse yet?

I should have said it more clearly, let me try again: Forex or spot is not classed as an investment instrument by SOME Fin Reg bodies. Therefore, depending on which country you are conducting your business from and whoever the Fin Reg is for that country, this may mean you could trade someones account by a limited power of attorney without been regulated, but........... your company would still need to be approved by the Fin Reg!

Hi Captain, yup, thanks for those answers, makes sense.

It would be certainely nice if you could pay a company a fixed amount to do all the leg work for you and set a company up.

Yup again, they do indeed seem to exist as per my links from ET earlier:

http://www.myforexfund.com/

Having said that imo if you're going to go down the route of trading OPM you might as well set things up in a proper hedge fund way, ie as a fund that can trade any instrument and for any client, why voluntarily limit yourself when the costs are very competitive as it is, and one never knows what markets are going to be moving in advance:

http://www.capitalmanagementservicesgroup.com/index.html

http://www.greencompany.com/HedgeFunds/HedgeFundIncubatorFunds.shtml

http://www.turnkeyhedgefunds.com/index.html

Or some established big name legal firms:

Form a limited liability company as the manager, sponsor, general partner.

The management company then forms, organizes the partnership.

Legal=Formation, organization, secretary of state filings for an LLC and a LP.

The top tier firms get all this done between 10-15k.

An audit runs around 7K and isn't necessary until the fund is running for 10 months or so.

There are a half dozen firms that own the space. The money spent is well worth it, if you do well, your law firm will introduce you to fund of fund it represents. Dont underweight the networking benefits of having Sadis & Goldberg, Sullivan Cromwell, or a Paul Hastings

Now they can apparently get that all arranged and taken care of for sums for which you couldn't even open a hairdresser shop in any town with a population north of the average national IQ.

Still haven't managed to elicit from anyone who runs a hedge fund over here if the costs / hassle in the EU are comparable or not to what is decidedly low cost / low hassle in the USA, also keeping in mind that most hedge funds operated from the USA seem to be based offshore.

No EU hedge fund managers on here ?

Not like we're trying to get at deep down "secrets" in which I don't believe anyway or anything...

 

[Jack o'Clubs]

Still haven't managed to elicit from anyone who runs a hedge fund over here if the costs / hassle in the EU are comparable or not to what is decidedly low cost / low hassle in the USA, also keeping in mind that most hedge funds operated from the USA seem to be based offshore.

No EU hedge fund managers on here ?

Not like we're trying to get at deep down "secrets" in which I don't believe anyway or anything...

There was a poster on these boards who is now an infrequent visitor who set up a small hedge fund. IIRC he mentioned to me that below about £5m AUM it simply wasn't worth it given the costs associated with the various compliance issues. I can well believe that, and from some work I put into it (since shelved since managing Other People's Money was just not something I wanted to add to my overall levels of stress - and it's not like you can't get decent leverage on your own cash), Grantx's idea of structuring it as a loan was definitely the way to go.

 

[grantx]

JK,

“an agreement about how the profits would be split can be done informally”, ie illegally. So he gets prosecuted for unauthorised investment business, therefore the profits may be viewed as proceeds from a criminal activity, assets are frozen, and he will get stung by the tax man. I’ve seen it happen, and I’ve also been down the route of authorisation.

As with secrets, the problem with any crime is that if more than one person is involved, that’s one too many. if you lose big time, your friend may suddenly cop a plea bargain and become a plaintiff.

Captain,

Since 1995-6 forex/spot speculation in the UK has been regarded as an investment business requiring authorisation.

Regardless of how you wangle it, it won’t be legit without authorisation. Unless you know a circumvention (first time I’ve used that word)

Grant.

 

[Captain Currency]

Captain,

Since 1995-6 forex/spot speculation in the UK has been regarded as an investment business requiring authorisation.

Regardless of how you wangle it, it won’t be legit without authorisation. Unless you know a circumvention (first time I’ve used that word)

Grant.

Hello Grant,

I was'nt too sure what the regulations where in the UK - Thanks.
I know from dealing with my own Fin Reg - Irish Financial Services Regulatory Authority that under the IIA, spot Fx and Forward foreign contracts are not investment instruments and thus such securities can be traded on behalf of a third party without requiring authorisation, but the company must first need to be examined and
approved.

So as I said in the earlier posts, different Fin Reg/counteries have different sets of rules, so you must comply with the Fin Reg in the country you are doing business in.

I personally cant put an ad in a UK newspaper advertising managed account because I'm not regulated by the UK FSA. I can however advertise in my own country where I am approved.

Kind Regards,

 

[jkplay]

JK,

“an agreement about how the profits would be split can be done informally”, ie illegally. So he gets prosecuted for unauthorised investment business, therefore the profits may be viewed as proceeds from a criminal activity, assets are frozen, and he will get stung by the tax man. I’ve seen it happen, and I’ve also been down the route of authorisation.

As with secrets, the problem with any crime is that if more than one person is involved, that’s one too many. if you lose big time, your friend may suddenly cop a plea bargain and become a plaintiff.

Hi Grant!

Well if I was doing it for a friend I would do it for nothing and hopefully get a big ''christmas, birthday, valentines day - you name it day!' present - as far as the tax man is concerned. I can't see him going through my christmas stocking! Trust is very important between mates, especially when you are in business together - you are certainly not committing any crime but merely entering into a mutually beneficial, informal business arrangement.

If I gave my mate £1000 to put on a horse and I said to him if it wins he can get 30% of the winnings - im not doing anything wrong. As far as I can see, what Scotch's mate wants to do is allow Scotch to place his money on the roulette wheel (fx market), what happens to his mates cash when he withdraws it is nobodies business.

Alot of people set up power of attorneys and it is for a reason. I think it all depends on the relationship between this guy and his mate. IMHO there is no reason to overcomplicate what I can see as a relatively simple issue.

JK

 

[jiggly]

sign up with a broker that has a money managers facility......preferably one which allows your clients to gain real time access to the account for viewing purposes.

outline and agree on the profit splits or management fees......

get him to transfer funds into your account and sign over power of attorney for you to trade it.

explain the risks involved and the security of his money, get him to sign some sort of disclosure that he accepts this ...

make him aware that he has unquestionable access to his share of the profit/loss of his investment anytime he sees fit and that you are not liable for any losses. {put pen to paper on this one also}....essentially if he is not happy at anytime not to complain and moan at you about your performance....he can walk away anytime.

I appreciate he may be a good friend but how good will he be when he is put in a total or near loss situation.....you don't fully know anyone or how they will react... just like you don't know what the market will throw at you......

cover yourself always....if he doesn't agree to your terms, you don't want the headache of trading his money....simple

good luck

 

[grantx]

JK,

You’re making the wrong analogy. Betting is not the same as investing. Trust is important, but rarely absolute. But that’s from personal experience.

Of course Powers of Attorney are used, but for the right reasons.

“no reason to overcomplicate what I can see as a relatively simple issue” It is not a simple issue, and it is very complicated. Look at the FSA Rulebook(s) – if this was on your shelf, it would stretch to over a metre in length.

BSD, Jack,

Re setting up hedge funds (a one-man operation).

To avoid the relatively onerous regulatory requirements of on-shore hedge funds, the offfshore Isle of Man route, for example may seem appealing.

This is illusory; it is not a “soft-touch" option. If you are based in the UK, to operate an offshore fund/hedge fund still requires FSA authorisation to operate (you’re still in their manor, so to speak). For the Isle of Man side, you will need to apply to the Isle of Man regulator, who will require you are authorised by the FSA . Further, you will need to appoint offshore administrators for the fund and use the services of an Isle of Man barrister for all legal work. You will also need an execution/clearing/settlement/locum agreement with a UK clearer (but not necessarily the Isle of Man) .

Plus a suitably experienced UK legal advisor, ie from within the Square Mile (not the provinces) and an FSA recognised accountant (simple but rare).

Total cost for a one-man operation, around £40,000 before you even start business. If you are consistently profitable in your trading, and can do the same for other people, I would dispute the £5m as a minimum viability level. But, I am speaking in the context of a one-man operation; if more than one person is trading, the costs are phenomenal because extra positions (eg compliance officer) are required by the regulator.


Jiggly,

Harry won’t get away with it on those terms.

He could take a gamble and trade on his mate’s behalf for cut of the profits. If minor amounts of money are involved and it comes to the FSA’s attention, they’ll stop him, and either give him a warning and not take it further, or make an example and prosecute. But continually looking over one’s shoulder is not conducive to a profitable environment, nor one’s health and sanity. And if Harry’s friend gets a bit snotty about minor losses, he may need to resort to a few slaps.

(His Honour) Grant.

 

[jkplay]

JK,

You’re making the wrong analogy. Betting is not the same as investing. Trust is important, but rarely absolute. But that’s from personal experience.

Of course Powers of Attorney are used, but for the right reasons.

“no reason to overcomplicate what I can see as a relatively simple issue” It is not a simple issue, and it is very complicated. Look at the FSA Rulebook(s) – if this was on your shelf, it would stretch to over a metre in length.

Grant,

Unfortunately I have had the pleasure of studying the FSA regulations and I can tell you that trading somebody else's account, with their solicited permission, is not a controlled function if done through a SB firm or FX broker and if they sign the necessary documentation giving you permission.

You don't invest in the fx market, you bet on future movements! You can dress it up as you like but you are gambling with your mates cash!

This is a simple issue and you have not provided any evidence to state otherwise. I think Scotch has told his mate how well he is doing trading, and his mate hasn't ever done it but he wants some of the action without doing it himnself. He doesn't need to set up a HEDGE FUND or arrange any PERSONAL LOAN. All his mate wants is for Scotch to place trades for him (please correct me if im wrong Scotch) and that is a simple POA agreement.

How Scotch is reimbursed is none of ours (or the taxmans's) business.

I see you view if he was buying shares on behalf of his mate but all he wants to do is ''have a punt'' on the FX market.

JK

 

[grantx]

JK,

“All his mate wants is for Scotch to place trades for him...[via a] a simple POA agreement.” And gain financially from the arrangement.

I have had the pleasure of studying the exams, being authorised as a Registered Securities Representative, Registered Futures and Options Representative, and as a Member Firm .

What is or is not a controlled function is relevant only within the context of a member/authorised firm. Outside of this, “controlled function” is meaningless.

What is the difference between betting on the future movement of fx and betting on the future movement of a stock?

Grant.

 

[jkplay]

JK,

“All his mate wants is for Scotch to place trades for him...[via a] a simple POA agreement.” And gain financially from the arrangement.

I have had the pleasure of studying the exams, being authorised as a Registered Securities Representative, Registered Futures and Options Representative, and as a Member Firm .

What is or is not a controlled function is relevant only within the context of a member/authorised firm. Outside of this, “controlled function” is meaningless.

What is the difference between betting on the future movement of fx and betting on the future movement of a stock?

Grant.

Ok Grant,

All I am saying is the way I would go about the arrangement if a FRIEND wanted me to do it for him.

You can put your detectives hat on and state what you would do as a tax man with all the facts but I imagine this isn't millions of ponds we are talking about and merley a bit of fun between friends.

JK

 

[jkplay]

1.What is or is not a controlled function is relevant only within the context of a member/authorised firm. Outside of this, “controlled function” is meaningless.

2.What is the difference between betting on the future movement of fx and betting on the future movement of a stock?

Grant.

1. Exactly. Scotch is not an authorized firm and his friend merely wants to give control of his account to Scotch. Of course it isn't a controlled function so there is no reason for the FSA to get involved with this debate.

2. Maybe their is none but I know it is possible with FX brokers and have no experience or knowledge of the process with equity brokers.

JK

 

[grantx]

JK,

A “controlled function” is meaningless to a dog-breeder. The context is investment business and authorisation. Jack is proposing controlled functions requiring authorisation, but without the authorisation. Arranging, advising, executing, discretionary, managing, are all controlled functions; even if carried out without authorisation outside of an authorised firm. Which of these doesn’t apply to Jack’s proposal?

I agree that it’s basically harmless/innocent. But strictly speaking, it’s illegal. I’m not judging anyone here or assuming a moral superiority - I don’t believe anyone can assume that. I’m pointing out the reality. Potentially, it could only be a matter of time before it goes pear-shaped.

Let’s assume they make some decent money and the profits are split. Is the income declared to the taxman or not? If not, then so be it (dodgey).

If so, does Jack declare 100% of the profits as his own or does Jack’s friend declare 100% of the profits as his own, or is the split profit arrangement declared (avoiding 1 party paying all the tax on only 50% of the gain)? Regardless how it’s declared, the other party will be on trading statements evidenced as to profit/offsetting of comm’s, etc. The Inland Revenue are not stupid; they can smell a rat a mile off – it’s their job.

So the taxman then enquires about Jack, and the relationship. This is only speculation, but I reckon if the taxman recognises an illegal arrangement, he will demand , quite legally, 100% tax. How far they would take something which is manifestly the work of amateurs – declaring illegal income for tax - is debatable. However, I can assure you that once your investigated by the Inland Revenue, even if completely innocent of any wrongdoing, they rarely let go. This has happened to friend.

We can debate the ins and outs of this for ever. Why doesn’t Jack simply write to the FSA: can I split profits with my mate on his account if I trade it for him, without authorisation?

Are you saying that Jack’s idea – taking a cut of profits via a discretionary arrangement - is possible through a UK forex broker? Which one?

I always say, if you can't do it legally, don’t do it, or face the consequences.

Grant.

 

[grantx]

Captain,

I’m surprised that fx is exempt from authorisation in Ireland. But before anyone reckons they can get the next ferry and set up shop, you also mention “the company must first need to be examined and approved”. OK, may be less demanding than authorisation but I reckon the Irish regulators are not going to allow every man and his dog through, especially as they have invested so much into developing Dublin as a credible financial centre.

I guess (which I do quite often) it depends on whether one holds/controls clients’ funds (you’re going to tell me the opposite, now aren’t you?). This would reflect the degrees of UK authorisation – from the highest ISD Category A, merchant banks, etc to the lowest non-ISD Category D.

They traded fx futures on a floor in Dublin a few years ago. What happened to it?

Grant.

 

[Captain Currency]

Hello All,

Hopefully this will be my last post on this topic - my inbox is overloaded

I think the question ScotchHarrry initally made in post 1 was how he could trade his mates account Legally

So if ScotchHarry is proposing to carry out this type of business from the UK - he would need to be regulated by the FSA as Grant pointed out "Since 1995-6 forex/spot speculation in the UK has been regarded as an investment business requiring authorisation"

Ok thats me done on that, you have permission to shoot me if I reply on this topic again!

Captain,

I’m surprised that fx is exempt from authorisation in Ireland. But before anyone reckons they can get the next ferry and set up shop, you also mention “the company must first need to be examined and approved”. OK, may be less demanding than authorisation but I reckon the Irish regulators are not going to allow every man and his dog through, especially as they have invested so much into developing Dublin as a credible financial centre.

I guess (which I do quite often) it depends on whether one holds/controls clients’ funds (you’re going to tell me the opposite, now aren’t you?). This would reflect the degrees of UK authorisation – from the highest ISD Category A, merchant banks, etc to the lowest non-ISD Category D.

They traded fx futures on a floor in Dublin a few years ago. What happened to it?

Grant.

Hello again Grant,

I not surprised that Fx is not classed as an investment instrument by the Irish Fin Reg.
Having spent a huge amount of time on this subject a few years ago with the Fin Reg, brokers and accountants - I would happily accept that its not classed as an investment instrument. When you break down what you are actually doing when you "trade" Fx with a broker, its is actually very different than buying a traditional stock/share through a broker which is classed as an investment instrument. When you hit the buy/sell button on your Fx brokers platform you are not physically buying any currencies unlike a stock cert, you may only be taking a position/bet against your broker/market maker.

Now before you start jumping on me, Im just telling you my opinion and what I believe to be true, this is the reason why Fx is NOT classed as an investment instrument by the Irish Fin Reg. Basically because its not an investment in their opinion.

Quiet simply it depend on what you are doing and who you are doing it with, you dont get to choose what you call it (by the way, I dont have any problems with the word gambling its not a dirty word in my language).

Example of what I mean:
Joe Bloggs "buys" Bank of Ireland (BOI) throught his spread betting account = Not Investing.
Joe Bloggs buys Bank of Ireland (BOI) through his broker account = Investing.
Joe Bloggs "buys" Fx Eur.Usd through his broker or spread betting co. = Not Investing.

Bottom line: I would not class trading Fx as an investment, neither do the Irish Fin Reg, that is why it is not classed as an investment instrument.

Yes, and before people see an oppertunity to open a trading business in Ireland because of these rules, think again. I must comply fully with the Irish Fin Reg and disclose all my activities, I cannot advertise my business outside of Ireland.

Kind Regards,

 

[jkplay]

JK,

A “controlled function” is meaningless to a dog-breeder. The context is investment business and authorisation. Jack is proposing controlled functions requiring authorisation, but without the authorisation. Arranging, advising, executing, discretionary, managing, are all controlled functions; even if carried out without authorisation outside of an authorised firm. Which of these doesn’t apply to Jack’s proposal?

I agree that it’s basically harmless/innocent. But strictly speaking, it’s illegal. I’m not judging anyone here or assuming a moral superiority - I don’t believe anyone can assume that. I’m pointing out the reality. Potentially, it could only be a matter of time before it goes pear-shaped.

Let’s assume they make some decent money and the profits are split. Is the income declared to the taxman or not? If not, then so be it (dodgey).

If so, does Jack declare 100% of the profits as his own or does Jack’s friend declare 100% of the profits as his own, or is the split profit arrangement declared (avoiding 1 party paying all the tax on only 50% of the gain)? Regardless how it’s declared, the other party will be on trading statements evidenced as to profit/offsetting of comm’s, etc. The Inland Revenue are not stupid; they can smell a rat a mile off – it’s their job.

So the taxman then enquires about Jack, and the relationship. This is only speculation, but I reckon if the taxman recognises an illegal arrangement, he will demand , quite legally, 100% tax. How far they would take something which is manifestly the work of amateurs – declaring illegal income for tax - is debatable. However, I can assure you that once your investigated by the Inland Revenue, even if completely innocent of any wrongdoing, they rarely let go. This has happened to friend.

We can debate the ins and outs of this for ever. Why doesn’t Jack simply write to the FSA: can I split profits with my mate on his account if I trade it for him, without authorisation?

Are you saying that Jack’s idea – taking a cut of profits via a discretionary arrangement - is possible through a UK forex broker? Which one?

I always say, if you can't do it legally, don’t do it, or face the consequences.

Grant.

We can argue this in and out for day's but I suggest Scotch just gives his broker a call. I know it is possible for Scotch to place trades from his friends account with no further regulatory requirements provided they both consent with a legally binding agreement most brokers provide. He is not carrying out a controlled function. If you don't believe me phone and ask about POA agreements and ask if the guy you designate needs to be regulated.

Most of your argument seems to be about Scotch's reimbursement. I am not a tax man and trade tax free myself via SB so can't give any tax advice.

I would do my friend a favor by placing trades for him, legally, via a POA agreement. As far as reimbursement once my friend withdraws his winning's - nobody needs to know. There is nothing illegal about this if done with an SB broker (which may be the best way for you to do it) and with forex brokers its just the tax issue.

If you are worried I suggest you consult a tax advisor Scotch and phone around some brokers to confirm the ins and outs.

JK

 

[BSD]

There was a poster on these boards who is now an infrequent visitor who set up a small hedge fund.

Hi Jack, thanks for your answer. I think it's great that he did that, even Soros or Buffett (who also started with hedge fund originally) started small at the outset

Heard anything how he's doing so far in his new role ?

I also hear you very well concerning the merits or downsides of running OPM, did you read Marty Schwartz', originally featured in Market Wizards, excellent book Pit Bull: Lessons from Wall Street's Champion Day Trader, he was / is an enormously successful trader trading only his own money who at one point tried his hand at starting a hedge fund. That endeavour failed miserably because his style of trading going for tiny moves didn't translate well for liquidity reasons into the now much larger sums he was running, in combination with what must have been tremendous stress in dealing with recalcitrant clients expecting the moon but not getting it, sent him into hospital with a severe psychosomatic illness.

So, yes, there are as always definitely two sides to the idea of taking on clients.

Re setting up hedge funds (a one-man operation).

To avoid the relatively onerous regulatory requirements of on-shore hedge funds, the offfshore Isle of Man route, for example may seem appealing.

This is illusory; it is not a “soft-touch" option. If you are based in the UK, to operate an offshore fund/hedge fund still requires FSA authorisation to operate (you’re still in their manor, so to speak). For the Isle of Man side, you will need to apply to the Isle of Man regulator, who will require you are authorised by the FSA . Further, you will need to appoint offshore administrators for the fund and use the services of an Isle of Man barrister for all legal work. You will also need an execution/clearing/settlement/locum agreement with a UK clearer (but not necessarily the Isle of Man) .

Plus a suitably experienced UK legal advisor, ie from within the Square Mile (not the provinces) and an FSA recognised accountant (simple but rare).

Total cost for a one-man operation, around £40,000 before you even start business.

Ola Grant,

gracias for that, that indeed is the same here, many fall for the fallacy that they can set up a limited company in Gibraltar et al while personally remaining in Germany, expecting the tax authorities to then happily agree that taxes are no longer due, but inevitably face a nasty wake-up call as it doesn't work that way, of course, unless you personally move to Gibraltar et al.

But that said, and keeping the above in mind of the added stress inherent in having clients looking over your shoulder, £40,000 still doesn't seem high for starting a potentially extremely lucrative business, still don't think you could alternatively open a hairdressers for that.

Great answers, guys, more enlightened now, muchas gracias

 

[A Dashing Blade]

If we were to go ahead what steps would we need to take so that I can legally trade his money? is it a power of attorney-type thing?

1) Form Limited Company with 2 shareholders ie you & you're mate. Shareholdings should be in proportion to proposed profit split.

2) Open company account with (say) FuturesBetting

Job done.