Trading other people's money

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ScotchHarry

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Hello

A friend of mine has proposed a deal where he puts up some cash, I trade it, and we split the profits.

leaving aside for a second whether or not this is a good idea in the first place!

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?

Thanks for your help
 
Looking to do it legally, is in essence an absolute minefield.

You are creating your own quasi hedge fund.

Best solution is a gentlemans handshake over a few beers
 
It is a simple power of attorney form you both need to sign. This effectively gives you permission to trade off his account (check and confirm with your broker)

JK
 
make sure he is very aware of the potential downside /drawdown from your strategy. Obviously you'll both want to be focusing on the positives, but how much of his capital is he prepared to risk in order to benefit from the possible reward? 20%? 100%?

As with all these things, it's no stress when everything's going well - your exposure to the legal / regulatory side of things is more likely to occur if it goes pear-shaped, and keeping your partner informed of the possible shape of the pear in advance helps mitigate that.
 
Depends on the country, surely? And if you're buying actual shares or spreadbetting? I suspect there is a tax issue...

Other factors such as how much you intend to return if things go well and if things go badly. Will you stop if you lose 50% of the money he gave you? (Plus show accounts to demonstrate you didn't just blow it on beer.)

He is giving you the money because he almost expects you to give him a handsome return (otherwise I'd assume he'd put it in a higher rate interest account). How will he react if you tell him you've lost the lot in 3 months' time?
 
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Thanks for all the quick responses!!

We're in the UK if that affects anything. This plan is still a long way off from actually happening as I don't feel I'm yet able to hand on heart say that I could make money in the markets for him.

The main issues were how / who I'd have to be licensed with, and of course then there's declaring the income to the taxman etc...

We'd be trading FX through a broker rather than spreadbetting.
 
Harry,

This has been done to death on these boards. A Power of Attorney will not legitimise your deriving an income. You can't benefit from an arrangement if you are not authorised.

One possibility. This is highly speculative, and may be viewed as "evasive". Assume your friend can put up £10,000. You take this as a 12-month personal loan, trade it, and repay him the capital with interest, say 10% pa. The loan could be repaid early with a penalty clause, eg additional interest of 5% for the remainder of full year.

If you are good, maybe you could repay in full every month. But the rate is also raised.

Grant.
 
grantx said:
A Power of Attorney will not legitimise your deriving an income. You can't benefit from an arrangement if you are not authorised.
Click to expand...

Excellency,

very interesting. Must admit I haven't spared too much thought to any of this so far, but that may well be a mistake.

Remember Timothy Sykes, who in the short version turned a US$ 13 K gift from his family into audited US$ 1,6 million while still at Uni. With that money he formed a hedge fund which attracted some small investments but remained funded largely by his money. After his remarkable performance he decided to spread the word and went on a bit of media rampage which apparently didn't help his subsequent performance much.

Interesting in this context is that he formed a hedge fund with what is certainly great money by any account when seen in isolation, but not all that much when compared with average funds under management in the hedge fund industry, so if money wise that's sufficient to get started, what are the additional regulatory aspects, realize that's different here in the EU than in the USA, but do you know how big the hassle is in the UK, or have you heard anything in what EU country the hassle is smallest ?

Not about to start one, but info is always good to have.

Thanks
 
ScotchHarry said:
Hello

A friend of mine has proposed a deal where he puts up some cash, I trade it, and we split the profits.

leaving aside for a second whether or not this is a good idea in the first place!

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?

Thanks for your help
Click to expand...



Hello ScotchHarry,

I bet your friend has NOT asked you to show him some trading records, trading plans, money management plans, max drawdown plans etc.

Did he say something like this "I heard you doing well in this trading thingamagimigy, :eek: I have 10k stached away, tell you what mate, you trade it for me and I'le look after you".

3 golden rules in managing other peoles money: 1) Get the right client
2) Get the right client
3) Get the right client

They have to understand what you are "selling" to them and they got to know the real risks involved. You got to also understand what you getting yourself involved in, its a huge responsibility. If its not crystal clear and planned out it will cause you more trouble than you ever imagined.

Good Luck
 
Honey I shrunk The Shareholders Capital....

ScotchHarry said:
Trading other people's money
Click to expand...


Captain Currency said:
If its not crystal clear and planned out it will cause you more trouble than you ever imagined.

Good Luck
Click to expand...


"O'Neal's grip on the firm weakened after the company announced on Wednesday that it wrote down $8.4 billion in the third quarter, posting the biggest quarterly loss in the company's history."



Mr O'Neal is entitled to $US30 million in retirement benefits as well as $US129 million in stock and option holdings ($A173 million in total), according to an analysis by James Reda & Associates using Friday's share price of $US66.09. That would be on top of the roughly $US160 million he took home in almost five years on the job.





hmmm Billions of dollars in losses, and 100's of millions of dollars reward........ its a beautiful business is it not ?

Much like a bum trade sometimes you can leg it with some pay ?

Now please be upstanding for the national anthem of capitalism...

Be careful now ScotchHarry its a tough, er , biz, out there.... whats a company director to do if he gets sub quarter Billions of dollars in severance pay, poor chap...

And as the saying goes, theres nothing like messing about with OTHER PEOPLES MONEY..


Honey I shrunk The Shareholders Capital.... by BILLION$ OF DOLLAR$ $$$$$

Chin chin.... :p
 
Hello ScotchHarry,

From what I have read over the years, managing OPM (other peoples money) has been the downfall of many a good (profitable) private trader.

This game is psychologically very difficult without the added burden of worrying about losing your friends and/or relatives savings and having them ask you every couple of days/weeks - " how's my 10k doing, have you doubled my money yet ? "

It obviously can be done but I would think a trader needs at least a few good solid years of trading their own account successfully before offering their services. Over this time period you should have experienced all the good and bad times and have a robust, profitable trading method that works and you trust.

Darren
 
Hi thanks again for all the replies, I think we're going a bit off-topic as I wasn't necessarily asking for advice on whether or not it was a good idea for me to trade with his money, rather just the procedures to go through to make it legal.

Looks like a bit of a mess on that front so this (very hypothetical at this stage anyway) plan will be on the back-burner until we at least know more about that side of things.

Thanks again!
 
ScotchHarry said:
Hi thanks again for all the replies, I think we're going a bit off-topic as I wasn't necessarily asking for advice on whether or not it was a good idea for me to trade with his money, rather just the procedures to go through to make it legal.

Looks like a bit of a mess on that front so this (very hypothetical at this stage anyway) plan will be on the back-burner until we at least know more about that side of things.

Thanks again!
Click to expand...

hmm not sure if you could use http://futuresbetting.com/ as your access and whether this alters any professional view of you needing to be authorized or not, but worth a query ??
 
Eureka,

One more, Scotchharry setups up a collective2 account, your mate subscribes to receive your trade signals, yours that you publish (UK people cant autotrade, but they can receive published trades) then your mate exectues OR then your mate publishes those and you subscribe to his and you then execute based on his ,but yours trade reco's ?

We've tied the loop hole, have we not? your mate would pay you for subscription see, for your trades. As you can publish, have the legal write to publish your trades.

Is that a winner, ergo no authorization required..... ??


:idea: hmmm, sounds like a mare......
 
ScotchHarry said:
Hi thanks again for all the replies, I think we're going a bit off-topic as I wasn't necessarily asking for advice on whether or not it was a good idea for me to trade with his money, rather just the procedures to go through to make it legal.

Looks like a bit of a mess on that front so this (very hypothetical at this stage anyway) plan will be on the back-burner until we at least know more about that side of things.

Thanks again!
Click to expand...

Hi ScotchHarry.

I am a bit confused about what you are trying to do?

Am right in saying you have a friend who wants to set up an account with a forex broker and let you trade from his account? If so then a power of attorney would give you permission to trade his account for him and there are no further regulatory issues. Its in his name, the funds go in and out of his bank account and you have full power to make trades on his behalf.

As he is your friend I imagine an agreement about how the profits would be split can be done informally between you?

Please correct me if I am misunderstanding your situation

JK
 
ScotchHarry said:
Hi thanks again for all the replies, I think we're going a bit off-topic as I wasn't necessarily asking for advice on whether or not it was a good idea for me to trade with his money, rather just the procedures to go through to make it legal.QUOTE]

Hello again ScotchHarry,

Pour yourself a whiskey, its going to get painful!

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!


Tax:
Wheater you go down the spread betting or traditional broker route to trade your client money - any pip rebates, performance fees or any costs you charge to your client should be taxed at the normal rate. Some brokers are obliged to even tax you at source on rebates.

Summary:
Do you need another whiskey?
We are probably after frightening you to death on hallowean or just show you that its a lot harder than it looks. Like any business - it has to make you money, is taking on a few clients going to be worth your while after you've paid to get set up? what about the emotional costs? And dont forget your silent partner in the business - the taxman.


I wish I was a plumber,
Click to expand...
 
Captain Currency said:
ScotchHarry said:
Hi thanks again for all the replies, I think we're going a bit off-topic as I wasn't necessarily asking for advice on whether or not it was a good idea for me to trade with his money, rather just the procedures to go through to make it legal.QUOTE]

Hello again ScotchHarry,

Pour yourself a whiskey, its going to get painful!

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!


Tax:
Wheater you go down the spread betting or traditional broker route to trade your client money - any pip rebates, performance fees or any costs you charge to your client should be taxed at the normal rate. Some brokers are obliged to even tax you at source on rebates.

Summary:
Do you need another whiskey?
We are probably after frightening you to death on hallowean or just show you that its a lot harder than it looks. Like any business - it has to make you money, is taking on a few clients going to be worth your while after you've paid to get set up? what about the emotional costs? And dont forget your silent partner in the business - the taxman.


I wish I was a plumber,
Click to expand...

Hi

There is a massive difference between setting up your own business offering your trading services and doing it for a friend.

Tax and regulation are not matters that concern you if it is an informal agreement between you and your mate.

It is a very simple process, you just need to trust your friend to pay up when/if you make him money.

JK
Click to expand...
 
Getting rather intriguing here, just did some googling and came up with this:

First two threads from ET:

Starting with US$ 50 K:

I am researching starting a tiny hedge fund. Initial AOM would be just my contribution of 50k. While low, that is high enough to list on a few of the databases for performance after 1 year of audits.

Starting with US$ 5 million:

I would like to start a small hedge fund in Florida with about $5 million dollars. The investors will be friends and family, so i mostly want to keep the start up cost down as much as possible.

If there is anybody out there that could provide any help, that would greatly appreciated.

And from those threads you can find a lot of firms that will take care of what needs to be done to set up a fund.

Think though that if one does sthg like that absolute key would be to NOT give up any ownership, but rather to just pay them their fees which are pretty reasonable as far as start-up costs go:

"The fund 's returns along with money in/money out are audited; the management company simply needs a CPA for return filings and K1s to limiteds.

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."

If there are firms taking care of the regulatory issues involved in starting and running a hedge fund in the US the same should be available here.

Captain, aren't you running OPM ?

What legal form did you take ?

Anybody else running a hedge fund here ?
 
jkplay said:
Captain Currency said:
Hi

There is a massive difference between setting up your own business offering your trading services and doing it for a friend.

Tax and regulation are not matters that concern you if it is an informal agreement between you and your mate.

It is a very simple process, you just need to trust your friend to pay up when/if you make him money.

JK
Click to expand...

Hello JK,

I was actually thinking I was going off the topic a bit with the business angle, your correct.

What I should have said is: If your mate asks you to trade his account for him, you could set up a limited power of attorney agreement through you broker.
A seperate agreement between you and your buddie is advisable.
There is still a tax obligation on your behalf if you are making money from a service you are carring out. Even if you tell the taxman it is winnings and your mate gave you a gift of 50% of the profits, the taxman will probably hit you with some type of gain tax "gift tax". I dont know what the likelyhood of this happening is, but ScotchHarry did ask for the legal answer.

Why not get your mate to set up an account, get him to give you his username and password and you just trade his account!

If you do look to become an IB or someone who has a limited power of attorney on a "client" account, The broker MAY ask you for company details, regulations or approvals. Some brokers even look for "money managers" to be more active on the clients accounts and this may not suit your trading stlye.

Bottom line: If you really want to do it, Get a written agreement between you and your buddie, get his username and password - I would skip the power of attorney thing. Hopefully you will trade well and make money. You are responsible any gains.

Kind Regards,
Click to expand...
 
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