How to Start Your Own Hedge Fund

CostaKapo

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What does it take to start a hedge fund? The scary truth is that virtually anyone can start a hedge fund; and, it can be fairly inexpensive and easy to do. Why is this so scary? Among other reasons, hedge funds can attract investors while providing very little information; so, investors may not be able to make well-informed decisions. Then, hedge funds don’t need to provide regular (or audited) information on an ongoing basis. If your manager is a crackpot and you have to stay invested for the remainder of the year (or quarter or whatever), you could wind up with very severe losses.

(Prospective investors should choose very carefully.)

Of course…that won’t stop me from telling you how to set up a hedge fund. After all, I get a kick out of divulging Wall Street’s billion dollar secrets for free.

THE HEDGE FUND ENTITY

Hedge Funds are typically structured as:
•a limited (or limited liability) partnership, or
•a limited liability company, or
•a trust.

What structure you choose depends entirely on what you want and the laws in the state in which you are forming. (Non-U.S. readers should explore the entities in their home countries as well.)

For the remainder of this article, I’ll be referring to the most common hedge fund structure – the Limited Partnership, or LP.

To set up a limited partnership is fairly easy and inexpensive. In Illinois, you answer six questions on a fill-in-the-blank form, get a cashier’s check for $150, and send it to the secretary of state. How tough are the questions? If you can come up with a name and write your address, you are in business.

Running Total: $150.00

GETTING THE TAX ID NUMBER

You’ll need to get a tax id (FEIN) number from the IRS. Simple enough – go to the IRS website and get it online in a matter of minutes. It’s fast, easy, and free.

Running Total: Still $150.00

BECOMING AN INVESTMENT ADVISER

If you will have 15 or more investors in your hedge fund, you’ll need to register as an investment adviser with the SEC. (Note: That doesn’t mean you’ll have to register the hedge fund. We’ll get to that in a bit.) If you’ll have less than 15 investors, you may still have to register in one or more states. (See Rule 203(b)(3)-2 of the Investment Advisers Act of 1940.) I’d play it safe and register with the SEC. It’s not scary – they’re actually there to help you so long as you are not defrauding investors.

To become an investment adviser, you’ll need to sit for a regulatory exam – the Series 65. The Series 65 is a 3-hour, 140 question exam, of which 130 count towards your final score. It’s not the hardest exam in the world (part of the “scary” conversation above); but, you’ll need to score a 68.5% or better to pass.

The Series 65 doesn’t teach you a darn thing about investing. Instead, it’s a “minimum competency” exam designed to test your ethics and understanding of basic securities laws and practices. A study guide and a few hours of quiet reading can make you a pro.

SCHEDULING YOUR EXAM

Your state will generally “sponsor” you to take the exam (as opposed to the Series 7, which requires a firm’s sponsorship); so, you fill out Form U-10, sign over a check for $120, and schedule your exam.

Once you’ve successfully completed the exam, you are now licensed (though not yet registered) as an investment adviser.

Running Total: $270.00

THE “REGISTERED INVESTMENT ADVISOR” VS. “INVESTMENT ADVISOR REPRESENTATIVE”

At this point, you have a decision to make – Do you run your partnership/advisory business as a sole proprietor (eg., Joe Ponzio Sole Proprietor) or do you (as is more commonly done) create an investment advisory company to shield yourself from personal liability (eg., Joe Ponzio Funds, Inc.)?

To be safe, you create a corporation (or LLC, whatever) to act as general partner of your LP. (Your investors will be the limited partners). You’re cheap; so, you create your Illinois corporation for $175 instead of expediting for $300. Once incorporated, you’ll get a FEIN for your company as well.

Thus, you will personally be the Investment Advisor Representative (IAR) of your company, which will act as the Registered Investment Advisor (RIA).

Running Total: $445.00

REGISTERING YOUR RIA AND IAR

You’re just about there. First, you have to register your company as the RIA, which you will do through the Investment Adviser Registration Depository (IARD). The instructions are on the IARD site; so, I’ll spare you the details. It’s not rocket science; but, it will likely take you a few hours to figure it all out. (When I was starting my firm, I spent the better part of three months figuring all of this out. Then again, I didn’t have an article like this one to read!)

As of the time of this writing and through July of 2009, it is free to set up your firm on the IARD system.

Once your firm is set up, you’ll need to “register” yourself with your firm by filing a Form U-4. Coming in at 28 pages, it looks like a beast. (You can also file it electronically.) So long as you don’t have a lot of disclosures (eg., if you’re not a criminal), you won’t fill in half of them.

Submit your U-4 with a $30 check…
Voila! You are now an investment adviser, running an investment advisory firm and a hedge fund.

Total Cost: $475.00

I told you that it was scary easy.

SOME THINGS TO CONSIDER

For less than $500, you could technically be in business. You’ll need a few things to get started:

For Your Investment Advisory Firm:
•By-laws
•Compliance manual
•Code of Ethics
•Supervisory Procedures Manual
•Investment Adviser/Portfolio Management Agreement
•Everything else to run your business (website, business cards, etc.)

For Your Hedge Fund:
•A LP agreement
•Private Placement Memorandum
•A presentation or brochure about your proposed investment style (needed for capital raising and road shows)
•A custodian/brokerage account to house the fund’s securities

…along with checking accounts, etc.

If you are feeling really cheap, you can find a lot of this stuff online, and then tweak it for your business; or, you can pay a compliance service to provide you with many of these things.

REGISTERING YOUR HEDGE FUND WITH THE SEC

Hedge funds don’t technically register with the SEC. Instead, you’ll have to register your LP interests offering (corporations have stock; LP’s have interests; LLC’s have memberships; trusts have units of beneficial interest) with the SEC if you are offering the hedge fund to investors other than friends and family. So…you don’t register your fund; you register your offering, usually under Rule 506 of Regulation D of the Securities Act of 1933.

Though there is no fee for registering your offering, you will have to get a CIK number from the SEC and file Form D with the SEC and with each state in which you plan to offer or sell interests.

OBVIOUSLY…

Having gone through a lot of these steps over the years, it’s a lot easier for me to say than for you to do. Though I spent a few months digging around in the dark to get my firm started, I can now say that it is not all that difficult or expensive if I had to start over again.

As you can see that hedge funds are not as mysterious as Wall Street wants you to believe. In the end, a hedge fund is a partnership – not some special entity – that has a general partner (you or your investment firm) and limited partners (your investors).

Then again, don’t mistake this article as advice or compliance help. This is a broad overview of how to set up a basic hedge fund. The laws, rules, and regulations can change; so, make sure you are up to speed based on your situation. Via Joe Ponzio fwallstreet.com
 
I started one a few years back. But we haven't rested on our laurels. We looked only for privet investors and concentrated on box options. Yew would be amazed, but we all ended up spending our days on the beech.
 
I started one a few years back. But we haven't rested on our laurels. We looked only for privet investors and concentrated on box options. Yew would be amazed, but we all ended up spending our days on the beech.

Did you even read the post?
 
I would suggest reading the content, as it is very good content.
I would suggest getting a sense of perspective Joe. You're probably better off sticking to your side of the Atlantic where people are less likely to have the wherewithal to carry out the necessary due diligence and are more likely to believe they can run a multi-million dollar investment company with no priors, no money, no experience, no effort and no network.

Good luck with the Ponzio scheme.

In case you thought you'd carry on pumping me for google hits, I'm out.
 
I would suggest getting a sense of perspective Joe. You're probably better off sticking to your side of the Atlantic where people are less likely to have the wherewithal to carry out the necessary due diligence and are more likely to believe they can run a multi-million dollar investment company with no priors, no money, no experience, no effort and no network.

Good luck with the Ponzio scheme.

In case you thought you'd carry on pumping me for google hits, I'm out.

It simply points out the structure of a hedge fund, nothing more nothing less. I don't own or operate a hedge fund, I am not trying to get anyone to start one. I simply posted an article that explains the structure of what people believe to be a complex ominous financial structure. I am unsure of why every single post of yours is snark, do you have that miserable of an outlook on the world to need to always be so damn condescending to everyone.
 
Agree, not quite sure what the OP is attempting to demonstrate.

It's pretty clear if you actually read the post. I am reposting an article which the fellas over at wallstreetoasis.com thought was good content. It demonstrates the bare bones structure of a hedge fund, and how its not this ominous complex financial beast that people make it out to be.
 
It simply points out the structure of a hedge fund, nothing more nothing less. I don't own or operate a hedge fund, I am not trying to get anyone to start one. I simply posted an article that explains the structure of what people believe to be a complex ominous financial structure. I am unsure of why every single post of yours is snark, do you have that miserable of an outlook on the world to need to always be so damn condescending to everyone.
If you think that's all that constitutes a hedge fund then you need to talk to someone who knows something about the subject. The official and regulatory side is the tip of the iceberg Joe. Going through those procedures does not a hedge fund make. LOL

I only seem condescending because most people I talk to are halfwits. Not you of course.

Not sure my outlook on the world is miserable, but if that's the reality you're getting then stick with it, you're probably right.
 
If you think that's all that constitutes a hedge fund then you need to talk to someone who knows something about the subject. The official and regulatory side is the tip of the iceberg Joe. Going through those procedures does not a hedge fund make. LOL

I only seem condescending because most people I talk to are halfwits. Not you of course.

Not sure my outlook on the world is miserable, but if that's the reality you're getting then stick with it, you're probably right.

condescension stems from an air of superiority. That's hardly a miserable outlook :smart:

Well, based off the response the posters on wallstreetoasis.com gave this same content I figured that it would be appreciated here. I am sure no one over there has any experience with hedge funds. :rolleyes:

I'm sorry you have to deal with halfwits so often, it must be awful for someone with a low threshold for pain.
 
I come from a part of the world (India) where we cannot trade in international commodities or forex. My question is as a full time trader, is it possible for me to make it to London, under the Business Visa option and set up my own "hedge fund" to trade in these assets ?

Maybe I should be asking this to an immigration consultant rather than post on a trading forum, but would be thankful for any inputs.

UK Govt seems to be offering an entrepreneur visa but don't know how friendly that visa officer will be when I tell him that all I want to do is simply play the UK markets.:devilish:

At least this is what the rules seem to state:

Tier 1 (Entrepreneur) visas are ideal for entrepreneurs with some money to invest in the UK. If you have at least £50,000 to invest, you may be able to apply for this visa. In practice most people who apply will need to have £200,000 of available funds held in a regulated financial institution.
 
hey C

interesting .........but in truth not useful for 99.9999999999999% of T2Win viewers.........how would you trade in that hedge fund ?...............viewers here like to learn how to trade
 
hey C

interesting .........but in truth not useful for 99.9999999999999% of T2Win viewers.........how would you trade in that hedge fund ?...............viewers here like to learn how to trade

Well to use the "Karen Super Trader" example she signed up for a retail brokerage account under the LLC registration, using the TIN and entity as the owner of the account. She trades a Think or Swim account much like many of us, only her capital is in the millions versus most retail traders being in the thousands, sometimes hundreds of thousands.

According to the SEC Form D the registrant is Hope Investments LLC
http://www.secinfo.com/$/SEC/Registrant.asp?CIK=1516872
 
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https://www.tdameritrade.com/account-types/specialty.page

Limited Liability


A Limited Liability account offers some of the most popular benefits of partnership and corporate accounts. It offers the pass through tax status of the partnerships, and the limited personal liability of corporations. The liability of the company and its owners is limited to their investment. States that require two or more members are MA, SD, and WY. TD Ameritrade offers accounts for legally established LLCs.

Client Profiles: Cash, Cash and Margin, Cash and Option; Cash, Margin and Option

Account Minimums and Fees:

There is no minimum initial deposit required to open an account.
 
What about a prop firm?

I have no clue to the registration and infrastructure of setting up a prop firm. That is a different beast and I believe prop firm's have their own registration and licensing process.
 
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