Is this the best way to start up a quant hedge fund or prop shop anywhere?
A great discussion I came across within a new Hedge Fund group I just joined within Linked In.
ou don’t need any sort of trading history to register as a hedge fund. Pretty much any Joe Blow with money to pay a lawyer can establish a hedge fund. You will most likely need/want the trading history for marketing purposes.
Regarding that, you have a few of options. Probably the easiest would be to go ahead and establish a relationship with a fund administrator when you start trading the private account. Depending on what your fee structure will be when you actually launch the fund, the admin. can/will analyze your monthly trades and calculate your hypothetical net asset value as if you’re already operating as a fund. So, if you’re going to use the standard 2/20 fee structure, the admin. will hypothetically pull out those fees to give you an pretty good idea what your monthly returns will be net of management and incentive fees.
If you want to use the private account’s returns for marketing the fund, you’re going to have to pay for verification or an audit of those returns anyway, so you might as well get in front of the eight-ball and do it from day one. It will probably save you money to pay the admin. monthly, as opposed to paying them to go back in time and verify trades that may be hard to value.
If you’re trading on exchanges and have brokerage accounts (stocks, options, forex, etc.), it shouldn’t be hard to do any-of-the-above. If you’re trading more abstract instruments, I would strongly recommend getting on board with an admin. before you start with the private account. Depending on your assets under management, what you’re trading, and how hard you bargain shop, you’re looking at paying anywhere from $500 – $15,000 per month for new fund administration. As you will see, necessary fees like admin. costs can eat up profits pretty quickly. I hope that helps!
As a proprietary trader, I went through the process of having my prop account audited for a marketing document, but the truth of the matter is, raising seed capital and establishing a track records as a “Fund Manager” is what matters to institutional investors. If I were you I would put your capital into a brokerage account under the funds name and “internally launch” the fund, thus establishing a track record as a fund and paying for the audit monthly through a 3rd party admin firm. This would take place after establishing the domicile and acquiring all legal docs. through the state/country you are domiciled in as well as docs for the sale of fund interest which you will want to hire a lawyer to do, and a business plan written by management, in extreme detail.
Launching an ‘incubator fund’ may be an ideal solution for you guys. In fact, it’s a great way to ‘wean’ into a full-fledged hedge fund, and is a really popular approach these days. The process is simpler, and start-up costs are considerably lower. It gives you the flexibility of time to develop your business plan & final Fund offering docs, and it enables you to build a performance record with your own funds before going live with investors, which you can in-turn provide to potential investors. It is restricted in terms of not allowing you to take on outside investments for compensation during the incubation phase, but it doesn’t sound like this is an issue for you since you’ll be trading out of a private account
Check out www.etops.ch or drop me a mail. We are working with new HFs, set them up plus operate them very efficiently on an outsourced basis. Result is full institutional stability from the outset at very efficient costs.
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