Forex for a trader
How to start forex hedge fund

How to start forex hedge fundHow To Start a Hedge Fund In the United States. The United States offers one of the best business environments in the world to start a hedge fund. In the first half of 2014 alone, 39 new hedge fund firms with at least $50 million dollars in assets under management were incorporated and managing in total more than $15.3 billion dollars. Given the growth and popularity of the hedge fund industry, here are the general steps for establishing a U. S.-based hedge fund. ( Related 7 Hedge Fund Manager Startup Tips) What is a Hedge Fund? The term hedge fund refers to any type of private investment company that is operating under certain exemptions from registration requirements under the Securities Act of 1933 and the Investment Company Act of 1940. (Ironically, hedge funds may use investment strategies that have nothing to do with hedging.) Given these exemptions, it is much easier to start a hedge fund firm rather than a firm that manages more highly regulated investment options such as mutual funds. The relaxed restrictions for hedge funds have helped bolster the growth of the hedge fund industry. File the Articles of Incorporation for the Hedge Fund Firm. In order to start a hedge fund in the United States, two business entities typically need to be formed. The first entity is created for the hedge fund itself and the second entity is created for the hedge fund’s investment manager. The hedge fund is typically set up as either a limited partnership or limited liability corporation. In comparison, the investment manager can be set up as a limited liability corporation, or some other type of business structure that meets the needs of the investment manager. In many cases, hedge funds are formed as limited partnerships, in which the investment advisor acts as the primary partner, and an incorporated group of investors acts as the secondary partner. Contact the secretary of state in the state where you plan to incorporate your firm for guidance about hedge fund business structures.

Regardless of the physical location of the firm, many hedge funds incorporate in Delaware because of its business-friendly laws. However, other states have introduced business-friendly provisions to help make their states more competitive with Delaware. Choose your best state for incorporation. Once the proper business structure has been determined for the hedge fund firm, name the fund and begin using the name to complete the necessary legal paperwork. In addition, the new firm will need to apply for a Federal Employer Identification Number (FEIN) with the Internal Revenue Service. An FEIN number can be obtained for free by applying online through the IRS website, or by filling out IRS Form SS-4. With this information, complete the state articles of incorporation. In the United States, companies can be formed in a very short period of time and with a minimal amount of money. Write the Hedge Fund Firm’s Corporate Bylaws. In today’s more regulated hedge fund environment, representatives for the new hedge fund firm will likely want to complete a host of documents in order to move forward with incorporation, register with the U. S. Securities and Exchange Commission (SEC), and register with the regulatory bodies in the state of incorporation.

The level of documentation and regulatory compliance will depend upon the type of hedge fund strategy the firm plans to use. At a minimum, the hedge fund firm’s bylaws should include a mission statement, a compliance manual, an ethical code of conduct, a manual for supervisory procedures, and an advisor portfolio management agreement. Register the Company as an Investment Advisor. In order to establish a legal partnership, the company must register as an investment advisor. Do this by going to the Investment Advisor Registration Depository (IARD) website. This process is free and can be completed over the Internet. Register the Hedge Fund Firm’s Representatives as an Investment Advisor. If the hedge fund is going to operate as a going concern, some of its representatives will likely need to register as an investment advisor with the U. S. Securities and Exchange Commission. The SEC requires such registration if the hedge fund is going to have 15 or more investors. Representatives can register as an investment advisor by visiting the IARD website. Representatives can also check with the secretary of state in the state of incorporation for more information. In order to register as an investment advisor, the representatives will need to take the Financial Industry Regulatory Authority (FINRA) Series 65 regulatory exam, which will test the representatives’ knowledge of securities laws and practices, as well as their understanding of ethics. After passing the exam, the representatives will be a licensed investment advisor with the state.

The fee to take the FINRA Series 65 exam is relatively inexpensive. Register the Hedge Fund Offering with the SEC. The hedge fund will also need to register the offering of the limited partnership with the SEC. Whereas corporations offer stock and LLCs offer memberships, limited partnerships offer interests. To register the hedge fund with the SEC, complete SEC Form D in each state in which the hedge fund will be offered. Comply with Consumer Protection Provisions. As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, hedge fund managers are subject to registration and reporting requirements. However, if the manager has less than $25 million dollars in assets under management, the manager is not eligible for SEC registration and must look to the laws of the adviser’s home state to determine registration and licensing requirements. Advisers registered in their home state can avoid SEC registration until they reach $100 million dollars in assets under management. Once they reach this level, hedge fund managers will need to complete Form ADV, which contains basic information about the adviser’s owners and affiliates, certain business activities that may give rise to conflicts of interest with clients, information about the private funds the adviser manages, and disciplinary information about the firm and its employees. If the manager registers with the SEC as an investment advisor, the representative will need to complete SEC Form PF if the hedge fund has at least $150 million dollars in private fund assets under management. SEC Form PF is a comprehensive document that will take a fair amount of time to complete and requires a fee for filing. Market the Hedge Fund to Potential Investors.

The rules that govern the marketing activities for hedge funds have changed as a result of the Jumpstart Our Business Startups Act of 2012 (JOBS Act).( Related Can you invest in hedge funds?) As a result of these changes, hedge fund managers have greater flexibility in marketing their hedge fund to potential investors. In the United States, hedge funds can be legally marketed to investors that satisfy certain standards of sophistication ( Rule 506(b), Securities Act of 1933 ). In addition, hedge funds can be marketed to the general public, provided all purchasers are accredited investors and certain other conditions are met ( Rule 506(c), Securities Act of 1933 ). However, except for a limited transition provision, the SEC has clarified that an issuer cannot rely on both Rule 506(b) and Rule 506(c) in the same offering. Hedge funds are also required to include a legend to the effect that the fund is not subject to the Investment Company Act, and if the general solicitation materials include performance data, the hedge fund is required to include additional legends and disclosures related to such data. (Source: mondaq. comunitedstatesx264860SecuritiesSEC+Am) Bottom Line. The complexity of starting a hedge fund firm is dependent upon the number of investors invested in the fund, the amount of assets under management, and the complexity of the hedge fund’s strategy for investors. There are a few hoops and hurdles to establishing a hedge fund firm in the United States, but these are easily understood. The greater challenge will be raising the necessary investment capital to operate the hedge fund firm as a going concern, and generating consistent hedge fund investment returns that outperform their representative benchmark proxy on a net-of-fee basis over time. 7 Hedge Fund Manager Startup Tips. Hedge funds can be mentioned over 1,000 times a day in blogs, newspapers, magazines and on radio stations. At the end of 2011, there were over 9,000 hedge funds in existence with 1,113 starting that year, according to Hedge Fund Research. In this article, we'll explore the reasons why these funds continue to be popular and what you should take into consideration before starting up your own hedge fund.

SEE: A Brief History Of The Hedge Fund Why Start a Hedge Fund? There are many reasons why starting a hedge fund is the new American dream. Here are some of the most popular: Almost everyone has read the news stories about the few hedge fund managers who have earned over $1 billion a year running their funds. Hedge funds grace the cover of mainstream media newspapers and magazines on an almost-daily basis. The secretive and exclusive nature of hedge funds has a draw, compared to many other areas of finance and investing, which can at times seem mundane. With a little bit of capital it is relatively easy to start a hedge fund. However, implementing risk controls, growing assets, hiring staff and running the organization as a profitable business, while producing positive performance, is very challenging. Between 4 and 10% of all hedge funds fail or close down each year, and countless others are half-started, abandoned or re-shaped into private investment pools for friends and family. This is not to say that starting a hedge fund is a bad idea, but it is important to realize that it is a very challenging endeavor - one that must be approached with the same long-term perspective required for running a business. Tips for Hedge Fund Startups If you are set on starting a hedge fund, there are dozens of factors that will determine your success. Here are seven tips or crucial areas of your new venture that you should be cognizant of and think through, before showing any potential investors or partners your business plan for your fund. 1. Competitive Advantage Your hedge fund must have a competitive advantage over others in the market.

This may be a marketing advantage, information advantage, trading advantage or resource advantage. A marketing advantage could be close career-long relationships with hundreds of high net worth investors or family offices. An example of a resource advantage would be if you work for a large asset-management firm that would like to heavily invest in launching a hedge fund. 2. Strategy Definition Some hedge fund startups underestimate the importance of clearly defining their fund's investment strategy. What is your strategy, and how will you define and explain your investment process to your own team and initial investors? Developing a repeatable, defendable, profitable investment process after taking the costs of running a hedge fund into consideration can be difficult. Ideas which have not been tested (or have been only backtested) in the real markets don't hold very much water with investors and consultants, who see hundreds of wannabe hedge fund managers a year. It will help to do some hedge fund performance research if you haven't already and know which strategies are currently doing well, which are not and why this may be the case. Are you launching your fund at a time when your strategy is in very high demand, or has the pendulum swung the other way for the time being?

Start building a list of the other hedge funds that run the same strategy as your firm and conduct as much competitive intelligence on them as you are able to, ethically and legally. 3. Capitalization and Seed Capital It is important that your new hedge fund be well capitalized. The amount of assets your fund will need to manage to become profitable will depend on three things: Team size Investment partners Unique cost structure. Some hedge fund managers claim profitability with less than $10 million in assets under management, while others claim that you must manage $110 million to $125 million in assets to be considered a serious business venture with some long-term prospects for survival. The number is probably somewhere in the middle, but everyone's business is unique and due to performance fees, you can sometimes see large profits with relatively low asset levels. 4. Marketing and Sales Plan Like any business, nothing happens until a sale is made. It is important to develop a sales plan for raising assets before you open your doors for business. One of the first steps in doing so will be deciding where you will try to raise assets. There are many potential sources of investors, including: Seed-capital providers Family and friends High net-worth individuals Financial advisors Wealth-management offices and RIAs Single - and multi-family offices Fund of hedge funds Corporations Foundations and endowments Pensions Sub-advisory relationships. Small hedge fund startups typically try to develop long-term relationships with seed capital providers, family and friends and high net worth individuals (directly or through their financial advisors). Working with institutional-quality investors who might eventually invest $25 million to $100 million at a time can be difficult until you have a two-to-three year track record and well over $100 million in total assets under management.

Some simple marketing and sales activities to complete and create before launching your fund include: Newsletters Website Two-page marketing piece 20-page PowerPoint presentation Professional logo Letterhead Business cards Folders with logos for presentations. Many of these are Business 101-type details, but they are often overlooked or poorly executed. Anyone who can really help your business grow sees hundreds, if not thousands, of hedge fund managers a year, and it is easy for them to see which managers have invested their time and effort and which have thrown something together at the last minute. All marketing and sales materials should be produced under the direction of your chief compliance officer or compliance consultant, as there are many limitations and details that need to be approved and reviewed. 5. Risk Management Risk management is an important piece of the puzzle when running a successful hedge fund. Your firm must come up with a concrete and competitive method for managing both business and portfolio risk or you will come off as not being serious about your business or long-term growth goals. There are many consultants and consulting firms that do nothing but advise hedge funds on portfolio and operational risk-management issues. 6. Compliance and Legal Assistance Hiring great legal counsel should be seen as an investment. An experienced hedge fund lawyer can help you avoid pitfalls and build relationships and invite you to networking events such as private-capital introduction dinners.

It will also show others in the industry that you are investing in your own business because you aim to be in the industry for the long haul. 7. Deciding on Prime Brokerage Many startup hedge fund managers underestimate the importance of choosing a prime brokerage firm, which can act as a partner to their business. The prime broker is such an integral part of how your hedge fund will trade and operate that you should take several weeks or months to evaluate your options and weigh the costs and benefits of doing business with the various firms you meet with. It is usually wise to choose a prime brokerage team that is very motivated to serve your needs, but not so small that they physically cannot meet all of your trading and prime brokerage requirements. While capital-introduction services can be a great thing for your prime broker to offer, know that they often require a nine - to 12-month track record at a minimum before they can do much for you beyond helping explore seed capital sources. Once your team has proven itself, a good prime broker will help make introductions if you have great performance and a solid team behind the portfolio. The Bottom Line Starting a hedge fund is a challenging endeavor that takes a multi-year commitment to refining your strategy, building a team, and finding both trading and marketing niches where your firm can profitably operate. While many hedge funds fail before they become large enough to be viable businesses, following the tips above will help save you time and gain some early momentum in marketing your portfolio. What Are the Steps Required to Set Up a Forex Hedge Fund? February 2011 | Forex Traders. Trading currencies has become a very popular investment activity over the past few years. Many have determined that the medium is either too high risk or too stressful for their tastes, but a relative few have invested the time required to learn the craft, have felt a personality match with the rigorous trading regimen, and have achieved a level of success and consistency over time.

As the word has gotten out regarding their prowess, friends have come forward with funds to add to the pool. Success breeds growth, but at some juncture in the timeline, the successful trader may soon want to formalise the informal arrangements at hand. The entrepreneurial spirit takes many forms in our culture, and the financial services industry is not an exception to the rule. At last count, some 10,000 estimated hedge funds populate the planet, with a subset of those devoted specifically to forex trading. To form a hedge fund, you will encounter many regulatory obstacles, but their intent is to protect investors, not block the path of an aspiring forex trader. Experts have written many pieces on this topic of a highly technical nature, but from the outset, the following checklist can be used as a guide for future areas of effort: Self Evaluation: Before getting too deep in the process, it is time to look in the mirror. Is forex trading the career that you envision for yourself? Are you committed to the craft and confident in your abilities to take on all the challenges that will be required? Once you begin accepting funds from other individuals, many of who will not be friends or friendly, are you prepared to deal with the customer service aspects of managing money in both the good times and the bad times? Positive answers are required, without hesitation; Compensation: As others will advise, it cannot only be about the money. You have to enjoy what you are doing, but the compensation aspects will provide a nice incentive. Typically, fee arrangements are in the 1% to 2% range with a 20% performance allocation on all returns. State laws may also require 'hurdle rates' (no compensation below a specified return), or you might consider them as a good marketing tool. For $2 million under management and a 30% return, you might expect fees of $140,000 for a year worth of effort; Specialised Attorney: An attorney experienced with the entire process can only address much of the regulatory 'tip toeing'.

A Private Placement Memorandum will be required to solicit customer deposits. There are specific SEC and state laws that must be followed in this area, and may restrict the number and type of client that you approach. The type of legal entity required will require additional effort and decisions; Certifications and Registrations: The Commodities Futures Trading Commission and the National Futures Association will require certifications and registrations related to investment advice, management, and pooling arrangements. Do you want to offer a managed forex account or a forex investment pool? Your attorney will help you in these areas also; Tax Issues: Depending on how you trade and in which markets, the tax laws will treat your earnings differently. Consult a CPA in this area for specific guidance; Lastly, be sure you have the financial net worth to support starting a new business on your own, capable of withstanding the bad times as well as the good. Starting a forex fund can be a daunting task, but many have succeeded in the effort. Perhaps, you are next in line. Guest contribution provided by Forex Traders. We provide Turnkey solutions for. Setup Forex Brokerage. YourOwnBrokerage is working with companies such as TopFX, ADS & Integral, and to create the most competitive Retail Forex business in the world. We couple the award winning Trading Platform and our own innovative technology to start organizations off with the right foundation needed to succeed in retail forex industry.

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Market conditions have never been better for setting up a forex fund. The number of forex funds and corresponding investors has grown as a result of expanding customer markets. Therefore, traders interested in starting a forex fund (or managing customer accounts) should familiarize themselves with the legal landscape as they consider earning a living in this profitable retail industry. An experienced and disciplined forex fund manager can earn a substantial income. Most forex funds to which we provide services are small. We often encounter people who have been trading accounts for others "under the table" and now want to formalize their arrangements. One key advantage to starting a forex fund is that the fund manager can legally accept compensation for his or her trading and advisory services. In many cases, the fund manager can legally advertise their services as well. This compensation can provide an excellent supplement to an existing income or it may allow trader to work as a paid forex adviser on a full-time basis. In our experience, many forex new fund managers also keep their "day jobs" for a while until they are certain this is the business they want to be in. Market conditions have never been better for setting up a forex fund. Whether you want to set up a fund or just invest in one, it is a good idea to understand the basics. Is Running a Fund Profitable? Forex fund managers typically demand management fees of % to 2% of assets under management (AUM) as well as performance fees of 20% of net gains a ear. This income can be substantial.

If you had a mere $2 million AUM and a 1% management ee and a 20% erformance fee, you would have management fee income of $140,000 ($2 illion x 1%) and (assuming fund performance of 30%) performance fee income f $120,000 ($2 million AUM x 30% performance = $600,000 x 20%). If you had $5 million nder management, you would have combined fee income of $350,000. If you had $1 billion UM, you would have $60 million in combined fees (assuming fund performance of 20%). Forex Fund Risks. Funds are not for the thin skinned; there are many real risks. In this era f global mood swings, all bets are off. Money invested in a forex fund must truly be discretionary. A fund is only as good as its advisers, so the human risk is significant. Greed and ego often trump integrity and ethics. Due Diligence. In 2008, there is also a noticeable trend toward increased review of funds by nvestors and counterparties (e. g., prime brokers, fund administrators, and auditors). Fiduciaries have a duty to perform due diligence to ensure that a fund's investment decisions are sound and compatible with their client's risk profiles. Prospects may submit a due diligence checklist to management, requesting extensive information covering every major aspect of the fund's organization, operation and management. Prospects may seek meetings with the officers of the fund and other persons significantly involved in the fund's business. How does a forex fund work? A forex fund requires infrastructure in the form of corporate entities. In the United Sates, we use a limited partnership as the fund and use an S corporation (or LLC) as the general partner (and forex adviser to) of the limited partnership.

When set up outside the United States, both the forex fund and its advisor are set up as corporations in a low or zero tax country or other jurisdiction. Managed Accounts. A CTA (commodity trading adviser) manages individual accounts, while a CPO (commodity pool operator) manages a fund (also called a "pool"). In our experience, many people lose interest in a managed account business when they experience the administrative hassles of managing separate accounts. However, some choose to be both. Advertising and Attracting Investors. Unless listed on a recognized securities exchange, a forex fund cannot advertise to solicit new investors in the fund. A forex trader managing accounts, however, can advertise his or her managed account services. A few countries have rules similar to those of the United States in this regard. Prospective investors in the fund like to see that you have invested your own capital in the fund. It is also a good idea to show prospects that you take fees subject to a hurdle rate, which means that you earn fees only when trading profits exceed a minimum percentage.

An investor in a forex fund should be sophisticated enough to understand the risks associated with forex trading. Many investors would be interested in forex funds if they had the opportunity. Because advertising of the fund and any other non-personal communications are prohibited, and the media has touted the risks over the benefits, investors must be sought in more direct and creative ways. A trader may find that in addition to family and close friends, many colleagues and casual acquaintances may be potential investors. If you are interested in getting investors for your fund, your selling efforts must be personally directed toward investors who are known to you. Advertising and any other non-personal communications are prohibited. For the forex trader who wants to trade for his family and friends, this is obviously no problem at all. Since the forex fund is an ideal vehicle to pool the resources of a small group of investors, forex funds can be especially appealing. How do I set up a forex fund? In 2008, forex traders remain positioned to launch a forex fund quickly without much red tape. In short, starting a forex fund means hiring a legal adviser with the proper expertise to prepare the required documents and provide you with tax and regulatory advice. You will have to work closely with your lawyer to prepare the private placement memorandum (PPM), fund's limited partnership agreement, and subscription agreement. A forex fund can be developed and launched within 2 weeks (on an expedited basis) but the normal development time is about 4 weeks. Offshore funds, while they can be incorporated quickly, take a little longer to establish due to the time required to open a bank and brokerage account for the fund. Favorable Tax Treatment.

There are two ways to trade foreign currencies and they have different tax rates. “Foreign currency contracts" are taxed by Internal Revenue Code Section 988. Currency futures, otherwise known as “regulated futures contracts” are taxed under Section 1256. Forward contracts and over-the-counter options in other traded currencies for which there is also trading in regulated futures qualify as "Section 1256 contracts." Gains from futures trading are taxed at a blended rate of 60% long-term gains and 40% short-term gains (regardless of how long a position is held). This 6040 split gives futures traders an advantage over forex traders. While the long-term rate is capped at 15%, the short-term (or “ordinary”) rate can go as high as 35%. The maximum blended 6040 rate is 23%. Forex gains are taxed at the short-term (“ordinary”) rates. Forex traders do not necessarily have to live with the higher "ordinary income" tax rates as they can “elect out” of ordinary income tax rates. Traders who do this will have their currency positions treated as Section 1256 contracts, and their gains will be taxed at the blended 6040 rate. In addition, the fund will most likely qualify as a "trader in commodities" so that investors are able to deduct the fund's expenses.

Securities Act of 1933. Forex funds are private and are not required to report returns, unlike mutual funds that are publicly traded and post their net asset values daily. In the United States, private (hedge) funds are unregistered securities offered as a private placement under the Securities Act of 1933. Also, in the United States, a forex fund is a Regulation D (Rule 506) offering in that it is an unregistered security offered as a private placement. Regulation D provides a safe harbor that exempts the private offering from compliance with the registration and prospectus delivery requirements of U. S. securities laws. However, Regulation D does not exempt an offering from compliance with the anti-fraud provisions of the law. You must supply all investors in your fund with offering documents (also called "disclosure documents") disclosing comprehensive information about the fund. Commodity Exchange Act. The Commodity Exchange Act (CEA) gives the Commodity Futures Trading Commission (CFTC) limited anti-fraud and anti-manipulation jurisdiction over off-exchange (also called over-the-counter or OTC) foreign currency futures and options transactions. "Forex transactions" are leveraged off-exchange foreign currency transactions where one party is a customer. The term does not include transactions that result in actual delivery within two days or that create an enforceable obligation to deliver between parties who are capable of making and taking delivery for business purposes.

Must I register with the CFTC? If you plan to trade currency futures contracts, currency futures options, or forward contracts, your fund must be approved by the CFTC. In addition, you must register with the National Futures Association (NFA) and become a CPO. The CEA defines a commodity pool as an "investment trust, syndicate or similar form of enterprise operated for the purpose of trading commodity interests." CFTC Exempt. A person who operates a commodity pool must register as a CPO unless an exemption applies. If you operate a pool that limits its trading solely to forex and only trades with authorized counterparties, it is not required to register as a CPO, but may do so voluntarily. Forex managed account managers are generally not required to register with the CFTC or become Members of NFA. Understand that any NFA Member forex dealer that services your customer accounts, or you introduce accounts to, is subject to NFA enforcement action for your conduct should your conduct violate NFA requirements. Violations can mean disciplinary action against your dealer even if it acts diligently and has no knowledge of your conduct. As a result, there is a trend among forex dealers to require NFA registration of forex traders managing customer accounts (including a fund). NFA compliance rules address the general issues of following just and equitable principles of trade and avoiding fraudulent behaviors. Commodity Pools. If your forex fund trades in commodity futures or interests, it is also a commodity pool and you are a CPO. Any person who is involved with the commodity pool must register as an associate of the CPO. A registered CPO is required to provide a detailed disclosure statement (the prospectus) to prospective participants in the pool. Your Disclosure Document must also be filed with the NFA at least 21 days prior to the delivery of the documents to a prospective participant and updated often. There are exemptions from the CPO registration requirements. Investment Adviser Registration.

If you plan to execute more than an occasional equity trade in your forex fund, you might also have to register as an investment adviser. If you manage less than $30 million, you are not eligible to register with the SEC (unless you are based outside the United States or you are based in Wyoming) but are subject to applicable state law. Each state has its own registration requirements. Offering Documents . Investors in your fund must receive all material information about the offering and the offering documents should be provided to all investors. Any investor who is not an accredited investor must have sufficient knowledge and experience in financial and business matters to be able to evaluate the merits and risks of your hedge fund. Since the PPM usually is the starting point for those conducting due diligence, it remains a crucial document. Accredited Investors . Regulation D limits the number of non-accredited investors to 35. Generally, accredited investors includes persons whose net worth (or joint net worth with that person's spouse) exceeds $1,000,000, or whose income was in excess of $200,000 in each of the two preceding years (or, together with that person's spouse, in excess of $300,000 in each of the two preceding years) and who reasonably expect to reach the same level of income in the current year. There are numerous other categories of accredited investors. Performance-based Compensation. Performance-based compensation for fund advisers are paid as an allocation of profits, typically 20%, associated with the growth of the fund. There are state regulations regarding performance based fees and these regulations vary considerably. In some instances, the compensation agreement specifies that funds be only paid when the profits of the fund exceed a hurdle rate. Blue Sky . Within 15 days of the first sale of your offering, an SEC Form D Notice of Sale must be filed with the SEC. Your fund must also comply with state blue-sky laws. In most states, Form U-2 must be filed.

Conclusion. Forex funds are about making money and running a forex fund is a great way to do so. The desire to pool assets in a way that is proper, both from a business and a legal standpoint, has led many forex traders to start their own forex funds. For a successful forex trader, a forexfund is an efficient, legal, and professional way to trade your own money along with the moneyof those who want to benefit from your expertise. No longer just for the elite, forex funds willcontinue to grow in varying financial conditions because of their complete market freedom. The private investment fund industry has years of success ahead of it. Talented forex traders will find profitable outlets for their skills, regardless of government regulation. Forex funds are about making money and running a forex fund is a great way to do so. About Hannah Terhune Ms. Terhune has nearly twenty years of solid experience working closely with people and businesses as an international tax and investment law (private investment fund) attorney. Her prior professional experience includes working as a tax law expert with two of the largest accounting firms in the world and with the United States Tax Court. She has an advanced law degree in taxation from The New York University School of Law (Legum Magister 1991) and a law degree from George Mason University (Juris Doctor 1989). She has served as an Associate Lecturer in taxation and business at George Mason University in Virginia and at Catholic University in Washington, DC. Her prior military service includes serving as Judge Advocate and Aide-de-Camp in the U. S. Army Special Forces. Ms. Terhune has written over 100 published articles and white papers on U. S. and offshore tax planning and private investment funds (hedge funds). [email protected] com. By Hannah M. Terhune, Capital Management Services Group. So You Think You Can Start a Hedge Fund? How to Become the Next Ken Griffin: Getting Up and Running.

First, the bad news : you haven’t picked the best time to start a hedge fund (assuming that you are reading this anywhere in between 2011 and the present day). It was much better to get into the game early – i. e. the late 90’s or early 2000’s – before everyone else also wanted to start their own funds. But if you have your heart set on becoming the next Ken Griffin, Ray Dalio, or John Paulson, I can’t talk you out of doing it. I can point out, however, that hedge funds require start-up capital in the millions or tens of millions , eye-popping legal bills, and entail constant scrutiny by current and potential investors. It’s a tough business that’s only getting tougher as the government piles on more and more regulation. So if you want any chance of success at all, you’d better have a novel, workable idea and the ability to raise tons of money. Starting a hedge fund because it sounds like an easy ticket to models and bottles, because you can’t find another buy-side job, or because you think you have a brilliant investment idea but haven’t tried it yet are all surefire ways to lose money. You also need to be entrepreneurial – as the founder of your own hedge fund, not only are you a portfolio manager, you’re also a small business owner. Thankless tasks like managing overhead, IT, HR, and marketing will fall on your shoulders. Even if you hire people to do this for you, expect to spend 20 – 30% of your time on administrative matters. If you still have your heart set on starting your own fund, though, here’s what you need first: Got a Strategy? Your investors will want to know exactly how you plan on making them money. Just saying you’re a global macro fund or a value investor won’t cut it – you need to show that you have a different way of executing those strategies with a repeatable process .

Got a Track Record? You also have to prove that your strategy has worked in the past under a variety of different market conditions. This is harder than it looks because you may be prohibited (by your firm andor the law) from using your past performance record in marketing materials for your new fund. Institutional investors (endowments, pensions, etc.) usually look for a 3 year-long track record . Funds-of-funds, family offices, and high-net worth individuals are comfortable with a 12 to 18-month long track record . If you can use your old numbers, they’ll need to reflect your investment decisions and show that the strategy used was similar to what you’re using in your new fund. If you were a research associate at a long-only dividend fund, don’t pretend that your performance there means that you can be the portfolio manager of a longshort international growth strategy fund. And if you can’t use your old numbers or you’re not coming from the buy-side, invest your personal account with your strategy and have the performance audited by a top firm – expect to pay around $10,000 USD for a Big 4 firm to do it. As one hedge fund manager told me, “If you can’t afford to audit your performance, you aren’t that good.” Got Money? You’ll need initial investors to get going. These initial funds could come from: Your own money Friends and family Family offices University endowments, pension funds, and foundations Hedge Fund seeders Funds-of-Funds. Investors like to see that the managers’ own money is a significant portion of the fund: having skin in the game increases your incentive to perform well.

You investors will probably have to meet the SEC definition of an ‘accredited investor’, although this varies a bit from state to state; international requirements may also be different. There’s no minimum amount that you have to raise, but you should consider the startup and ongoing costs of the fund, your fee structure, and work backward to a level of assets under management (AUM) that can support that. As a starting point, most prime brokers won’t work with funds under $5 million in AUM . The optimal situation is to be a superstar at a traditional firm and get money from them to start your new fund. Hedge fund seeder firms operate the same way: they give you capital in exchange for a portion of your fee income. And don’t think that your fundraising efforts end when the fund launches: marketing, fundraising, and yes, networking, are crucial to growing your fund. Even the biggest hedge fund managers with dedicated marketing departments can’t escape it – they’re still brought it at the end of the pitch to close the deal. Got Office Space? Some creative ideas for office space: Your house . Ken Griffin started Citadel this way, and Michael Burry of The Big Short ran his fund from home. A hedge fund hotel . Usually set up by prime brokers, managers get office space at below-market rates in exchange for steering brokerage business to the hotel’s host firm. Sharing space with other managers . Make sure you get along and aren’t directly competing with each other. Renting an office can be a huge expense, especially in financial centers like New York and London, so you’re much better off going with cheaper options when you first start out. When you get to $100 million in AUM and you have $2 million per year in management fees to cover your office, consider upgrading – but until then, frugality is the name of the game. Got Service Providers?

Even a single-person hedge fund must rely on a team of external partners to make the fund run. Be prepared to pay for quality – institutional investors will consider the reputation of your service providers a reflection of your credibility. So if you don’t spend enough on the right providers, you’ll have trouble growing your fund and getting better-known investors on-board. Here’s who you’ll need: Lawyers. A good attorney should be your first call when you decide to start your own fund. Your fund lawyer will guide you through the whole startup process and provide referrals to other service providers. Though the best-known hedge fund law firms are in New York, any city with a bulge bracket bank presence will have a local firm or two known for hedge fund law. The actual hedge fund structure depends on whether your investors are taxable or tax-exempt, whether or not they’re US citizens, and the investment terms. Some points to consider: Fee Structure . The standard fee structure used to be “2 and 20”, meaning a quarterly management fee of 2% and annual performance fee of 20% on the gains. The trend now is for lower management fees and higher performance fees . And some funds are even more aggressive – SAC Capital famously charges “3 and 50,” the highest fees in the industry. Lockup Term . This is the length of time that investors’ money has to remain in the fund before it can be withdrawn. It should match your strategy – a global macro fund trading ETFs all day will have the liquidity to support a short lockup term, whereas an activist fund needs a longer lockup term to reflect the longer time it takes to realize the strategy. Redemption Terms . How much notice do investors need to give when they want to take their money out? Usually funds only allow redemptions at the beginning of an accounting period (quarterly or annually).

Performance Targets . Are you trying to outperform a particular index? Is there a rate of return you have to beat before collecting performance fees? You may have to register as an investment advisor with your state or the SEC if your fund meets certain criteria. For example, all hedge funds have to register as investment advisors in Louisiana, but funds in Massachusetts are exempt if all of their investors are accredited investors. Outside the US, registration requirements vary wildly so you’ll have to do your own research there. For a simple hedge fund setup, expect to pay between $10,000 and $50,000 . More complicated setups can go into hundreds of thousands of dollars . Auditors. Outside auditors will also have to verify your performance on a regular basis, and institutional investors will demand to see that performance before investing money. Administrator. An administrator handles the majority of your back office operations, like trade reconciliation and allocation. Again, institutional investors will be looking for a quality, reputable administrator – you can’t ignore this just because it’s “the back office.

” Marketers. Third-party marketing firms find potential investors and pitch on your behalf. They either work on retainer for a specified time period or get paid a cut of the funds they raise for you. Prime Broker. Prime Brokers provide leverage, let you borrow securities to short, and custody your assets. They also manage the brokers and dealers you trade through. Smaller funds (under a billion dollars) may prefer to use an introducing broker , who’s partnered with a major prime broker but who customizes the services for smaller funds. IT and Technology Providers. You’ll also need Bloomberg terminals (around $1,500 USD per month, each ) and possibly other technologies to support all the trades you make. The good news here is that IT expenses tend to be much lower for fundamentally-oriented funds with little active trading; if you’re a quant fund or you’re doing any kind of automated trading, though, you’ll need serious computing power and serious cash to pay for it. Got Cash for Yourself? Don’t expect millions to come rolling in after you flip the switch on for your fund – most managers don’t even pay themselves a salary until their AUM gets big enough for management fees to cover overhead with plenty of room to spare. And even if they get amazing returns in their first few years, they’ll re-invest most of those performance fees back into growing the fund itself.

In the meantime, you still need a place to live and food to eat. So make sure that you have enough savings or another income source to cover your daily living expenses – and remember that it may take years to establish the AUM you need for long-term success. What Next? Raising capital, setting up everything above, and figuring out your strategy are just the first steps of a long and grueling process when starting a successful hedge fund. You’ll also need to plan your day-to-day strategy , hire investment professionals , and figure out your own exit strategy if things don’t quite work out – all of that and more is coming up in parts 2 and 3 of this series. Complete Series – How to Start Your Own Hedge Fund: Where To Start: Managed Accounts Or Hedge Fund? Jul 9 2010 | 9:32am ET. By James Bibbings, Turnkey Trading Partners -- I am routinely asked about the advantages and disadvantages of starting a Commodity Trading Advisor (“CTA”) as opposed to a Commodity Pool Operator (“CPO”). This is a great question and one that all money managers interested in handling forex or commodity managed accounts should consider. If answered incorrectly this question could literally ruin the chances for success as a CFTC registrant and NFA member. If that statement wasn’t strong enough to peak interest how about this one; a wrong decision in this space will likely cost thousands of dollars and countless hours of valuable time. Certainly there are many considerations that must be accounted for when determining how to begin any trading operation. Among these factors simple decisions such as how to raise assets, what products to trade, and where to locate the business will need to be considered. However, it may come as a surprise that sifting through a laundry list of business decisions is actually not the most challenging part of establishing a lasting CTA or CPO business. In my experience the biggest challenge facing new and emerging money managers comes after many of the so-called “easy decisions” are made.

Specifically, what I have found is that the overall direction and success of the business will likely result from the intricate way that each of the company’s individual decisions piece together. The complexity and sheer number of variables associated with professionally managing commodity and or forex accounts is nearly incomprehensible. Although this is true, I have put together the following short list of important considerations that should be discussed by the business from its inception. Keep in mind however that this list is not intended to be inclusive of all necessary factors needed to make an informed decision. A regulatory professional should be consulted with any questions that may arise prior to moving forward with any long term decisions. 1. How large an investment is required to trade the strategy? The first and perhaps most obvious consideration should be determining the minimum investment required to participate in the trading program. Will clients be able to access the model with a $10,000, $50,000, $250,000, $5 Million Dollar or more deposit? It will be important to determine the minimum amount of funds needed under management to effectively trade the program. Here are a few basic things that should be immediately considered while trying to arrive at this answer: A) How large will anticipated draw downs be? Can client accounts survive a hypothetical worst case scenario with the funding level selected? B) Based on the products being traded will the accounts have enough funds to cover margin?

Meet security deposit requirements? Have the resources to invest across several markets with differing margin requirements simultaneously? C) How much leverage does the program require? What will account margin to equity be under normal trading conditions? Under extreme trading conditions? Will notional funding be used or considered – what implications will this have on program volatility? D) How much in assets under management will the company require to remain viable? With standard industry management fees at 2% and incentive fees at 20% a pro-forma estimation of profitability should be performed and taken into consideration. 2. How will the company gain access to investment capital? After determining the minimum account size needed for the program to function properly, figuring out who will invest should come next. Based on the figures from above how many investors (realistically) does the company likely have access to? 1, 5, 20, 1,000 or more? Of these people how many of them are likely to invest within the program? How many of them will be institutional or high net worth investors? What will the average deposit size likely be? After these points have been considered it should be relatively easy to determine how much capital may be available to the strategy at its inception.

This exercise will also help to more readily identify the path that should be pursued – CTA or CPO. In this instance remember that 1,000 accounts depositing $10,000 each are not equivalent to one account investing $10 million independently. Keep in mind that the administrative costs and operational requirements to manage 1,000 accounts will be substantially higher than those of trading only one. 3. What is the company’s overall experience level? A large majority of the people I speak with have aspirations to start the next big commodity or forex hedge fund. That may turn out to be true, but it’s not likely if the members of a company have no prior experience in the financial markets. Entering into any highly regulated industry exposes people to an incredibly sharp learning curve. As with any best in class operation it probably won’t be realistic to assume that the “next big fund” will be run by a group of individuals with no prior experience managing client money. This of course is not to say it’s impossible, however it is highly unlikely. In making a decision to start a CPO or a CTA it’s very important to assess the company’s skill set and determine what might be missing for success to be obtained. Consider who will run operations? Handle potentially complex accounting issues? Knows the company’s commodity andor forex compliance obligations? Can trade with consistent results? Will solicit on behalf of the program and how will they do it? Making a Decision CTA vs. CPO. Once the strategy’s capital requirements have been thought out, after determining how much money may be available, and evaluating the company’s experience level it’s time to start deciding on whether a CTA or a CPO is the right choice. To make this decision all of the company’s intentions and goals must be considered in aggregate.

It simply will not be enough to look at one particular factor and make a final directional decision. At this time it is in the company’s best interest to contact a regulatory professional that specializes in only commodity and forex matters. If the company is not yet ready to contact a regulatory professional today, then take a moment to carefully think through the questions presented in this article. After doing so I have put together some general thoughts on the most common advantages and disadvantages of both CTA and CPO businesses for consideration below: Commodity Trading Advisor. Individually managed client accounts have the following advantages: - Administration, start-up, and maintenance costs are very low - Regulatory requirements and overall learning curve is relatively low - In general overall costs to the investor should be less - Accounting and financial requirements are significantly less complex - Client funds must be held with an FCM or FDM rather than with the advisor. In a post “Madoff” world this eases client concerns. Individually managed client accounts have the following disadvantages: - May require a higher minimum investment as assets will not be pooled - Challenging if not impossible to diversify into multiple strategies or investment opportunities - Client accounts will have to adhere to strict individual margin requirements - Trading may become tedious as the number of accounts and clearing firms utilized by the strategy rise - CTA clients will utilize FCMFDM documents to open an individual account; client identities will not remain anonymous. Commodity Pool Operator. Pooling client assets as a registered fund has the following advantages: - Can allow for greater strategy diversification and investment opportunity - Minimum investment levels may be lower as accounts are pooled - May provide investors with a more focused investment advisor - Individual investors will not have margin calls made to them - May allow for the operator to collect additional fees - profit margins may be higher. Pooling client assets as a registered fund has the following disadvantages: - Administration, start-up, and maintenance costs are very high - Regulatory requirements and learning curve is significantly steeper; SECFINRA, CFTCNFA, and State Security registration may be required. - In a post “Madoff” world investors may be wary of depositing funds with new managers - Hurdles for clients to profit andor break even within the strategy are relatively high - May require a funding threshold to be hit in order to begin trading. It is important to remember that making the decision to begin managing client funds is a difficult one, but with proper preparation can be incredibly rewarding. Over the coming years I am anticipating and looking forward to seeing more money managers come into the market place; however few will become the “next big thing.” The financial markets are uncertain, but one thing is for sure those who fail to plan will likely never get off the ground.


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