% fee to take?

[cabum]

Hi all!

A couple of my friends proposed me to trade with their money on US stocks and options markets. To start with, they proposed $15000 each ($30000 total). I have the next questions.
1) I'm planning to open an offshore company and transfer money to US broker from it's account. Do I need to have any licenses for trading, whatever?
2) What % is reasonable to take for managing (of course if profits exist)? What is a "usual" practice in such questions?
I've never dealt with such questions so have no idea what to think about this idea.
Really appreciate any help.
Thanks

 

[Jack o'Clubs]

You could try the 'standard' hedge fund terms of 1% management fee and 20% of alpha. Depends on how much of a 'friend' they are: it might be a bit mean to charge the 1%, and you could just base it purely on alpha performance. Ukranians with $30k to throw around on trading? Are you sure the penalty for underperformance won't be a pair of concrete boots or a good sniff of Polonium 210?

 

[cabum]

You could try the 'standard' hedge fund terms of 1% management fee and 20% of alpha. Depends on how much of a 'friend' they are: it might be a bit mean to charge the 1%, and you could just base it purely on alpha performance. Ukranians with $30k to throw around on trading? Are you sure the penalty for underperformance won't be a pair of concrete boots or a good sniff of Polonium 210?

You joker..
$30000 is pretty big money as for now. But I'm planning to see what happens, at least I'll try to keep losses as low as possible. And of course my friends are aware of this business, that it is risky indeed (that was my term as for them). And for now we decided on 50/50 (only as for profits and no management fees) at least with one of them. I think this is good terms. What do you think?

 

[Jack o'Clubs]

I think that from your perspective those are excellent terms!

 

[Directional]

I hope you have demonstrated consistent profitability before thinking about handling someone elses money, and that they fully understand the risks involved before sending you some cash!

Do they understand that the risk of total loss is a possibility? or are they so rich that they this is chump change for them?

I hope its the latter. Not trying to be a stick-in-the-mud but losing someone elses money for them even with the best of intentions can seriously strain friendships. 50% of no profits is nothing to you, but 100% of losses are your friends to eat and enjoy as he see's fit.

You should always put anything like this carefully into writing, spelling out the risks in verbose and agreeing who is liable for what, as well as, of course, the profit shares. This will avoid any disputes later on, profits or losses.

regarding licenses, if your friends agree to give you their money on a loan/promissory note arrangement, then in theory the money becomes "yours" or at least, your companies, as far as the regulators are concerned so you can do what you like with it if its in your own account.

 

[Jack o'Clubs]

regarding licenses, if your friends agree to give you their money on a loan/promissory note arrangement, then in theory the money becomes "yours" or at least, your companies, as far as the regulators are concerned so you can do what you like with it if its in your own account.

Arb,

Is that the case in the UK also? I've been thinking of ways of getting round FSA requirements as a few friends / family have asked me to run some money for them and doing it through a 'loan' was the best idea I could come up with.

I totally agree on your point about doing this for 'friends' though. Trading is stressful enough when going through a sticky patch, without having to explain to a mate that you've lost a bundle of their cash. Also wouldn't dream of taking 50% of the proceeds when they're taking 100% of the risk (unless I was somehow guaranteeing the capital) - maybe 20% after a 10% hurdle, or something like that.

 

[Directional]

JOC,
I'm not 100% but i'm fairly certain that if you "borrow" money from someone - friend or bank, regardless of what you intend to do with it, that the capital comes under your own remit & control, and thus you can do what you like with it (trade it).

Trading someone elses account under a power of attorney can be done, but AFAIK you start encroaching into FSA territory, providing advice etc. I dont know enough about the technicalities of what the FSA considers their remit & boundaries etc, so perhaps someone else can advise.

Obviously you cant really use a loan arrangement to do any really significant sums unless you have a very trustworthy relationship with the person loaning - ie: in a business arrangement, you'd seldom get someone you dont know to "loan" a trader money because for all he knows he'd get a postcard from Deigo Garcia instead of a PnL statement, and legally there'd be boogger all he could do about it.

Just for the OP's benefit, I know you havent had time to reply yet so I dont know what your plans are exactly or your experience in trading, but just to expand on my prior observations about losses - agreeing profit share is fine, but you also need to imagine what you will say if you lose say 60% of their money - how would you feel? what would you say? more importantly - what would THEY say & how would they react?

with all due respect, i have close friends in eastern europe & $30k is a huge amount of money for your average citizen - I'd certainly not like to have to explain any serious losses to someone if they really couldnt afford to lose that money!

and even if they are wealthy, as JOC astutely obvserved you really dont want any polonium210 coming your way either :cheesy:

 

[roguetrader]

The first question may be, how much do you value their friendship? Such a venture may seriously put these friendships to the test.
Agree totally with what Arbitrageur says.
To do this properly is a huge undertaking, getting the legalities correct, I'm also not sure if you become a "professional trader" in the eyes of brokers and data providers, something else to consider. I might consider taking on one friend's money to incorporate with my own, on an informal basis, as a loan say, with a fixed return where I had his/her input totally covered but not a group, all sorts of personal issues could come to the fore, the trading may actually become the least of your concerns. Best of luck whatever you do.

 

[RogueTrader888888]

Get the whole arrangement down on paper and signed asap.