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.