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Where do you begin in launching your own Hedge Fund?
Where do you begin?
Begin by deciding on your trading strategy and assessing your accredited investor client pool.
Begin by deciding on your trading strategy and assessing your accredited investor client pool.
Generally, US Hedge Funds are set up as Limited Partnerships. To accommodate this structure, we set up a Limited Liability Company which functions in the role of General Partner to the Limited Partnership. The General Partner (the LLC) appoints the Investment Manager. The Investment Manager may be a registered Investment Adviser, if you have more than 15 investors, you must have a registered Investment Adviser. The Investment Manager makes all trading and investment decisions for the Fund.
As I mentioned above, we must also set up a Limited Partnership, this is in effect the investment fund partnership. The partners of the fund share in the profits of the fund according to their partnership agreement.
You will need to provide a name for the LLC and a separate name for the LP.
You will need to designate where your office will be located, which custodian you plan to use to clear your trades, which bank your plan to use, who your accountant will be, and if you plan to have a fund administrator.
You will also need a detailed Offering Memorandum, this is the document you give to your clients, it details your trading strategy, what type of risks you plan to take, and what sector you plan to invest in. Attached to the Offering Memorandum is the Subscription Agreement, this is a series of questions about the financial status of your clients to determine if they are accredited investors. As due diligence on your part, you must have each of your clients complete the Subscription Agreement.
How much do you need? There is no minimum to start a Hedge Fund, however to gain access to Capital Introduction you generally need a minimum of one million dollars.
How do you create your own fund? Contact scottgoldringassociates.com />
What is an Accredited Investor?
The federal securities laws define the term accredited investor in Rule 501 of Regulation D as:
- a bank, insurance company, registered investment company, business development company, or small business investment company;
- an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
- a charitable organization, corporation, or partnership with assets exceeding $5 million;
- a director, executive officer, or general partner of the company ...<< MORE >>
How do you start a Hedge Fund?
So, what is a Hedge Fund, and how do I start one?
A hedge fund is an investment fund usually limited to accredited investors. The difference between a Hedge Fund and a traditional Broker - client relationship, is that the money that is invested in the fund is pooled together which allows the manager to take on larger and perhaps riskier positions. Hedge Funds seeks to balence thier portfolio by utilizing different trading strategies, such has long or short positions, option trading and utilizing margin.
A hedge fund is an investment fund usually limited to accredited investors. The difference between a Hedge Fund and a traditional Broker - client relationship, is that the money that is invested in the fund is pooled together which allows the manager to take on larger and perhaps riskier positions. Hedge Funds seeks to balence thier portfolio by utilizing different trading strategies, such has long or short positions, option trading and utilizing margin.
The federal securities laws define the term accredited investor in Rule 501 of Regulation ...<< MORE >>
The power of a well written indemnification clause
A well structured indemniffication clause can save you a mountain of grief later. There are many scenerios in which a well written indemnifcation clause can help you, that angry client who can't understand how you lost thier money, even though it is the worst market since the great depression, you simply chose the wrong strategy and shorted at absolutely the wrong time, or the sector of the market in which you trade has taken a beating, and while you know these stocks are currently undervalued and a good buy in the long run, in the short term it looks like ...<< MORE >>
How to make the move from Broker to Hedge Fund Manager
It is not necessarily as hard as you may imagine to make the move from Broker to Hedge Fund Manager. You may think you need 25 million to get started, but you can start with 1 million or even less. If you are looking to break away, there are a number of ways to transition your clients into first a independant Broker-Client relationship, and then into a Hedge Fund structure.
It may all appear daunting at first, setting up an LLC, and LP, coming up with a clear concise trading objective, and finding accountants, but with the right guidance even a small fund can flourish.
When considering any transition, most retail brokers will ask the following question: How can I make a viable living? If you are a broker who has the ability to make your own investment and trading decisions it may interest you to know that you have many choices.
Some Brokers may be used to paying 60-70% of thier hard earned commissions to a Brokerage House, but most are not aware that there are ways your only slippage cost could be less than $0.005 per share. There are clearing firms that will facilitate a Broker Dealer arrangement with your clients. These clearing firms on many occasion offer far more tools than the typical retail broker is accustomed to.
The clearing firms who offer this service will hold on record the client/broker agreement as well as the power of attorney, which allows the transfer of monies to the broker’s master account as per the client/broker agreement. These agreements can be structured on a monthly, quarterly or yearly basis. The clearing firm will furnish all monthly and tax statements, the broker will execute all trades, and the client will gain access to his account on a daily closing basis. When clearing costs are much lower, the broker can negotiate a client/broker agreement that benefits the client and broker and not the brokerage firm.
In today’s rapidly changing environment the personal trust between broker and client and the relationship that has been built over a number of years must be preserved and is perhaps the only constant. The typical retail broker environment encourages a large up front commission and as a consequence a more buy and hold oriented approach. It is quite clear that in order to successfully compete in today’s environment one must have, amongst other things, the ability to long/short stocks and utilize option markets to manage risk.
A broker may not wish to rely on research that told him to buy a stock at $60 over ten years ago when it is at $40 today. Instead the broker must take control of his destiny and utilize tools that are may not be available to the typical retail broker. The speed and cost of execution, trading costs as low as $0.001 per share, real time Theta and Delta analysis, 6 for 1 margin on qualified accounts, real time balances; access to a plethora of fixed income opportunities; theses are all tools that are quintessential for managing money in today’s world, and grant the retail broker a departure from the buy and hold strategy that is so often his only option.
If a broker wants to pool his resources and start a hedge fund then the process can be facilitated within a month. The fees associated with the formation of a fund are generally amortized over a five year period, these start up costs are generally reimbursed to the General Partner by the Limited Partnership. There is no minimum amount needed to start up a fund, you can begin with $100,000.00 or 1,000,000.00. When starting a new fund it is important to facilitate transparency with a reputable accounting firm, one that makes itself accessible.
The standard compensation for a Hedge Fund Manager is 2/20, but it is at the discretion of the General Partner and can be negotiated with each client. It is not uncommon for the General Partner to receive a monthly management fee, but the profit incentive is usually paid at the end of the year again the structure can be negotiated and customized. As a Manager of a Hedge Fund a Broker may set up a standard 2/20 agreement with his client, and pay a total round trip commission cost of $0.006 per share or less. If, for example, a broker can generate a 30% return on $5 million, his compensation could be $380,000. If a broker generates no return then his income could be $100,000. How much business would a broker need to generate to receive that type of income in a regular commission environment?
The primary advantage of utilizing a fund structure is the ease at which beta and performance can be advertised in order to bring in additional capital. As everyone is looking for low beta high returns, these are important characteristics that institutions and private investors quantify when appropriating new capital.
As the retail brokerage industry moves through its own transition, retail brokers may appreciate that they must transition as well. The importance of receiving the right advice and guidance when you make that first step cannot be underestimated.
It may all appear daunting at first, setting up an LLC, and LP, coming up with a clear concise trading objective, and finding accountants, but with the right guidance even a small fund can flourish.
When considering any transition, most retail brokers will ask the following question: How can I make a viable living? If you are a broker who has the ability to make your own investment and trading decisions it may interest you to know that you have many choices.
Some Brokers may be used to paying 60-70% of thier hard earned commissions to a Brokerage House, but most are not aware that there are ways your only slippage cost could be less than $0.005 per share. There are clearing firms that will facilitate a Broker Dealer arrangement with your clients. These clearing firms on many occasion offer far more tools than the typical retail broker is accustomed to.
The clearing firms who offer this service will hold on record the client/broker agreement as well as the power of attorney, which allows the transfer of monies to the broker’s master account as per the client/broker agreement. These agreements can be structured on a monthly, quarterly or yearly basis. The clearing firm will furnish all monthly and tax statements, the broker will execute all trades, and the client will gain access to his account on a daily closing basis. When clearing costs are much lower, the broker can negotiate a client/broker agreement that benefits the client and broker and not the brokerage firm.
In today’s rapidly changing environment the personal trust between broker and client and the relationship that has been built over a number of years must be preserved and is perhaps the only constant. The typical retail broker environment encourages a large up front commission and as a consequence a more buy and hold oriented approach. It is quite clear that in order to successfully compete in today’s environment one must have, amongst other things, the ability to long/short stocks and utilize option markets to manage risk.
A broker may not wish to rely on research that told him to buy a stock at $60 over ten years ago when it is at $40 today. Instead the broker must take control of his destiny and utilize tools that are may not be available to the typical retail broker. The speed and cost of execution, trading costs as low as $0.001 per share, real time Theta and Delta analysis, 6 for 1 margin on qualified accounts, real time balances; access to a plethora of fixed income opportunities; theses are all tools that are quintessential for managing money in today’s world, and grant the retail broker a departure from the buy and hold strategy that is so often his only option.
If a broker wants to pool his resources and start a hedge fund then the process can be facilitated within a month. The fees associated with the formation of a fund are generally amortized over a five year period, these start up costs are generally reimbursed to the General Partner by the Limited Partnership. There is no minimum amount needed to start up a fund, you can begin with $100,000.00 or 1,000,000.00. When starting a new fund it is important to facilitate transparency with a reputable accounting firm, one that makes itself accessible.
The standard compensation for a Hedge Fund Manager is 2/20, but it is at the discretion of the General Partner and can be negotiated with each client. It is not uncommon for the General Partner to receive a monthly management fee, but the profit incentive is usually paid at the end of the year again the structure can be negotiated and customized. As a Manager of a Hedge Fund a Broker may set up a standard 2/20 agreement with his client, and pay a total round trip commission cost of $0.006 per share or less. If, for example, a broker can generate a 30% return on $5 million, his compensation could be $380,000. If a broker generates no return then his income could be $100,000. How much business would a broker need to generate to receive that type of income in a regular commission environment?
The primary advantage of utilizing a fund structure is the ease at which beta and performance can be advertised in order to bring in additional capital. As everyone is looking for low beta high returns, these are important characteristics that institutions and private investors quantify when appropriating new capital.
As the retail brokerage industry moves through its own transition, retail brokers may appreciate that they must transition as well. The importance of receiving the right advice and guidance when you make that first step cannot be underestimated.
Welcome
Welcome to the Scott Goldring Associates Blog. This Blog deals with issues and ideals surrounding the formation of Hedge Funds.
If you would like information on forming a Hedge Fund, visit www.scottgoldringassociates.com for more information.
For other economic and financial commentary visit www.goldringstockpicks.com
If you would like information on forming a Hedge Fund, visit www.scottgoldringassociates.com for more information.
For other economic and financial commentary visit www.goldringstockpicks.com
