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How to start a hedge fund in the US? Any advice?


muscleman
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I just got the green card yesterday so I no longer need to continue to be a code monkey for the longer term.

I've been learning investing since a few years ago and had reasonable results. I'd like to start a hedge fund but I have no clue how to get started, any things to pay attention to and how to keep the costs as low as possible.

Can anyone give me some advice?

 

Thanks!

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A couple years when the stock market only goes up with negligible volatility is probably not enough experience to take on other people's capital.  My advice is to continue learning, build an audited track record over multiple market cycles - at least one bear market - and to start to cultivate a group of people with investment capital who over time express an interest in you taking over management.  Then you can either start a small partnership, or much easier and lower cost, use a separate account advisor platform at a broker like IB.  You will need the series 65, so you could start studying for that while you build a track record over a meaningful period of time.

 

I doubt you will find it pleasant to manage outside capital through a bear market if you have never managed your own capital through a bear market.

 

I just got the green card yesterday so I no longer need to continue to be a code monkey for the longer term.

I've been learning investing since a few years ago and had reasonable results. I'd like to start a hedge fund but I have no clue how to get started, any things to pay attention to and how to keep the costs as low as possible.

Can anyone give me some advice?

 

Thanks!

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All you need to be a successful hedge fund manager is be able to convince people to give you their money. Track record helps but you need to be a bit of a salesman as well. You could start with friends and family, or start a blog and get a following.

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All you need to be a successful hedge fund manager is be able to convince people to give you their money. Track record helps but you need to be a bit of a salesman as well. You could start with friends and family, or start a blog and get a following.

 

+1

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It takes 100-200 hours over 4+ months to set up a fund.

 

1. Pass the Series 65 or whatever securities exam you qualify for.

2. Find a lawyer, broker, accountant and auditor.

3. Register your corporate structure with your state. The most common is to set the fund up as an LP and the investment manager as an LLC.

4. Get federal tax ID numbers.

5. Set up an IARD/Web CRD account with FINRA.

6. Write your brochure, subscription document, LP agreement, code of ethics and other legal documents (with the help of lawyers who will charge $20k+). The most important detail from the regulator's perspective is the basis of your exemption from securities registration. The most important details from your client's perspective are fees, lockups, accounting policies, investment and risk management approach, etc.

7. Submit your Form ADV and brochure.

8. Register as an RIA and IAR with your state securities regulator.

9. Set up a brokerage account - you will need to provide them with the legal documents, RIA and IAR numbers, and tax ID numbers.

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It takes 100-200 hours over 4+ months to set up a fund.

 

1. Pass the Series 65 or whatever securities exam you qualify for.

2. Find a lawyer, broker, accountant and auditor.

3. Register your corporate structure with your state. The most common is to set the fund up as an LP and the investment manager as an LLC.

4. Get federal tax ID numbers.

5. Set up an IARD/Web CRD account with FINRA.

6. Write your brochure, subscription document, LP agreement, code of ethics and other legal documents (with the help of lawyers who will charge $20k+). The most important detail from the regulator's perspective is the basis of your exemption from securities registration. The most important details from your client's perspective are fees, lockups, accounting policies, investment and risk management approach, etc.

7. Submit your Form ADV and brochure.

8. Register as an RIA and IAR with your state securities regulator.

9. Set up a brokerage account - you will need to provide them with the legal documents, RIA and IAR numbers, and tax ID numbers.

 

Thanks a lot! It sounds pretty complicated.

Do you think an offshore hedge fund would be less complicated?

 

 

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Guest Schwab711

It takes 100-200 hours over 4+ months to set up a fund.

 

1. Pass the Series 65 or whatever securities exam you qualify for.

2. Find a lawyer, broker, accountant and auditor.

3. Register your corporate structure with your state. The most common is to set the fund up as an LP and the investment manager as an LLC.

4. Get federal tax ID numbers.

5. Set up an IARD/Web CRD account with FINRA.

6. Write your brochure, subscription document, LP agreement, code of ethics and other legal documents (with the help of lawyers who will charge $20k+). The most important detail from the regulator's perspective is the basis of your exemption from securities registration. The most important details from your client's perspective are fees, lockups, accounting policies, investment and risk management approach, etc.

7. Submit your Form ADV and brochure.

8. Register as an RIA and IAR with your state securities regulator.

9. Set up a brokerage account - you will need to provide them with the legal documents, RIA and IAR numbers, and tax ID numbers.

 

This is somehow still an understatement :). You should be able to pass the 65 with minimal amounts of studying before you even consider starting a fund. I planned for over a year, had clients lined up for once I was live, and I had experience managing money already. Even then, I still wasn't fully prepared for everything and I have been working >60 hours every week for months now (I have not taken off a full weekend in over 10 months). 99.9% of portfolio managers do not have the glamorous job Ackman or Einhorn have. 1 man shops should expect to work at least 60-80 hours (preferably closer to 80) a week and be available literally 24/7 (meetings or calls with potential clients, current clients, mgmt for perspective investments, networking, ect). Buffett was successful because investing was his entire life. With this much $ available to be earned, you better believe the Larry Bird axiom is true; "When you're not working, someone else is". Be prepared to compete directly with billionaires and ivy leaguers.

 

You should be (no particular order):

1) A fantastic stock picker/financial analyst

2) Comfortable speaking about nearly any financial product (the younger you are, the more broadly knowledgeable you need to be in my experience)

3) Excellent public speaker

4) Excellent salesman (or woman)

5) Have an excellent track record (5+ years minimum; most folks want to see at least 7-10)

6) Be prepared to have your track record audited (a lot of institutional investors will not consider you without this)

7) Enjoy learning and have excellent recall (you are competing with the brightest folks in the world considering how much $ can be earned)

*You should probably have experience in accounting/auditing, financial analysis, programming, and possibly banking (imo). There's no single job I know of that will adequately prepare you for living off your own research/work.

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This is probably why doing this the Pabrai way makes sense.  He responded to a questioner about how to get started and his response was something like, find a job that pays well and save and invest these funds.  Once the achieve a critical mass, enough for you live off income, then find friends, family and fools to invest with you.  Then you can modestly grow from there.  Racemize is doing this and is something I think is more achievable to many here (without the sales skills or motivation) versus trying to raise enough OPM to feed your family.  Just my 2 cents.

 

Packer

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This is probably why doing this the Pabrai way makes sense.  He responded to a questioner about how to get started and his response was something like, find a job that pays well and save and invest these funds.  Once the achieve a critical mass, enough for you live off income, then find friends, family and fools to invest with you.  Then you can modestly grow from there.  Racemize is doing this and is something I think is more achievable to many here (without the sales skills or motivation) versus trying to raise enough OPM to feed your family.  Just my 2 cents.

 

Packer

 

 

Thanks a lot! I will ask Racemize for more details.

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What's the major differences in setting it up via traditional channels vs IB?

 

Someone suggested to me via PM to start as investment advisory instead of a full fledged HF manager. The cost would be much lower and I would only provide services to manage individual accounts. I log into their accounts and trade, instead of asking them to send me their money. This will be much easier to earn trust than asking people to send me money and just trust whatever I do with their money.

IB has an automated feature to support this and it sounds like it can automatically withdraw fees from client's account into my advisory master account.

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It takes 100-200 hours over 4+ months to set up a fund.

 

1. Pass the Series 65 or whatever securities exam you qualify for.

2. Find a lawyer, broker, accountant and auditor.

3. Register your corporate structure with your state. The most common is to set the fund up as an LP and the investment manager as an LLC.

4. Get federal tax ID numbers.

5. Set up an IARD/Web CRD account with FINRA.

6. Write your brochure, subscription document, LP agreement, code of ethics and other legal documents (with the help of lawyers who will charge $20k+). The most important detail from the regulator's perspective is the basis of your exemption from securities registration. The most important details from your client's perspective are fees, lockups, accounting policies, investment and risk management approach, etc.

7. Submit your Form ADV and brochure.

8. Register as an RIA and IAR with your state securities regulator.

9. Set up a brokerage account - you will need to provide them with the legal documents, RIA and IAR numbers, and tax ID numbers.

 

This is somehow still an understatement :). You should be able to pass the 65 with minimal amounts of studying before you even consider starting a fund. I planned for over a year, had clients lined up for once I was live, and I had experience managing money already. Even then, I still wasn't fully prepared for everything and I have been working >60 hours every week for months now (I have not taken off a full weekend in over 10 months). 99.9% of portfolio managers do not have the glamorous job Ackman or Einhorn have. 1 man shops should expect to work at least 60-80 hours (preferably closer to 80) a week and be available literally 24/7 (meetings or calls with potential clients, current clients, mgmt for perspective investments, networking, ect). Buffett was successful because investing was his entire life. With this much $ available to be earned, you better believe the Larry Bird axiom is true; "When you're not working, someone else is". Be prepared to compete directly with billionaires and ivy leaguers.

 

You should be (no particular order):

1) A fantastic stock picker/financial analyst

2) Comfortable speaking about nearly any financial product (the younger you are, the more broadly knowledgeable you need to be in my experience)

3) Excellent public speaker

4) Excellent salesman (or woman)

5) Have an excellent track record (5+ years minimum; most folks want to see at least 7-10)

6) Be prepared to have your track record audited (a lot of institutional investors will not consider you without this)

7) Enjoy learning and have excellent recall (you are competing with the brightest folks in the world considering how much $ can be earned)

*You should probably have experience in accounting/auditing, financial analysis, programming, and possibly banking (imo). There's no single job I know of that will adequately prepare you for living off your own research/work.

 

 

My structure will not be a 1-man shop. Research and trading will be just me but meeting clients and those things will be done by my partners. Otherwise it will be a huge distraction.

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thanks for the idea about IB, muscle.

 

As far as the series 7 goes, I don't know if you really need it to manage. It's a license to sale securities so if you've got someone else selling, you probably don't need it (but I could be wrong).

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What's the major differences in setting it up via traditional channels vs IB?

 

Someone suggested to me via PM to start as investment advisory instead of a full fledged HF manager. The cost would be much lower and I would only provide services to manage individual accounts. I log into their accounts and trade, instead of asking them to send me their money. This will be much easier to earn trust than asking people to send me money and just trust whatever I do with their money.

IB has an automated feature to support this and it sounds like it can automatically withdraw fees from client's account into my advisory master account.

 

I've considered this, but what bothers me is that the client can see all of the trades being made. What's stopping them from just copying everything you do in real time, while giving only a small amount of money? Also, I fear giving access to real time portfolio value, with all of its ebbs and flows can cause distress to a client, and in turn problems for the portfolio manager. I think this is why Buffett reported account value only once a year, but I might be wrong on that.

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What's the major differences in setting it up via traditional channels vs IB?

 

Someone suggested to me via PM to start as investment advisory instead of a full fledged HF manager. The cost would be much lower and I would only provide services to manage individual accounts. I log into their accounts and trade, instead of asking them to send me their money. This will be much easier to earn trust than asking people to send me money and just trust whatever I do with their money.

IB has an automated feature to support this and it sounds like it can automatically withdraw fees from client's account into my advisory master account.

 

I've considered this, but what bothers me is that the client can see all of the trades being made. What's stopping them from just copying everything you do in real time, while giving only a small amount of money? Also, I fear giving access to real time portfolio value, with all of its ebbs and flows can cause distress to a client, and in turn problems for the portfolio manager. I think this is why Buffett reported account value only once a year, but I might be wrong on that.

 

Not to mention that they will second guess you every step of the way.  Value investing often in practice means investing in the shunned and the ugly.  Your clients may be calling you every day asking you why you are holding what you hold.  Too much hand holding needed, in my opinion

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What's the major differences in setting it up via traditional channels vs IB?

 

Someone suggested to me via PM to start as investment advisory instead of a full fledged HF manager. The cost would be much lower and I would only provide services to manage individual accounts. I log into their accounts and trade, instead of asking them to send me their money. This will be much easier to earn trust than asking people to send me money and just trust whatever I do with their money.

IB has an automated feature to support this and it sounds like it can automatically withdraw fees from client's account into my advisory master account.

 

I've considered this, but what bothers me is that the client can see all of the trades being made. What's stopping them from just copying everything you do in real time, while giving only a small amount of money? Also, I fear giving access to real time portfolio value, with all of its ebbs and flows can cause distress to a client, and in turn problems for the portfolio manager. I think this is why Buffett reported account value only once a year, but I might be wrong on that.

 

Not to mention that they will second guess you every step of the way.  Value investing often in practice means investing in the shunned and the ugly.  Your clients may be calling you every day asking you why you are holding what you hold.  Too much hand holding needed, in my opinion

 

I have invested some of my money with a manager who does the IB-managed-account thing.

 

I don't copy his trades.

 

I don't secondguess him.

 

So don't bark on the clients.  8)

 

One issue with IB setup from the client point of view might be the taxes. The trades and foreign currency exchanges that may be horrible to deal with at tax time if I can't get them automatically into TurboTax Online...

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What's the major differences in setting it up via traditional channels vs IB?

 

Someone suggested to me via PM to start as investment advisory instead of a full fledged HF manager. The cost would be much lower and I would only provide services to manage individual accounts. I log into their accounts and trade, instead of asking them to send me their money. This will be much easier to earn trust than asking people to send me money and just trust whatever I do with their money.

IB has an automated feature to support this and it sounds like it can automatically withdraw fees from client's account into my advisory master account.

 

I've considered this, but what bothers me is that the client can see all of the trades being made. What's stopping them from just copying everything you do in real time, while giving only a small amount of money? Also, I fear giving access to real time portfolio value, with all of its ebbs and flows can cause distress to a client, and in turn problems for the portfolio manager. I think this is why Buffett reported account value only once a year, but I might be wrong on that.

 

Not to mention that they will second guess you every step of the way.  Value investing often in practice means investing in the shunned and the ugly.  Your clients may be calling you every day asking you why you are holding what you hold.  Too much hand holding needed, in my opinion

 

I have invested some of my money with a manager who does the IB-managed-account thing.

 

I don't copy his trades.

 

I don't secondguess him.

 

So don't bark on the clients.  8)

 

One issue with IB setup from the client point of view might be the taxes. The trades and foreign currency exchanges that may be horrible to deal with at tax time if I can't get them automatically into TurboTax Online...

 

You don't second guess him, but you're also a value investor yourself. Needless to say most people are not like me and you.

 

Copying trades is such an easy and obvious thing to do; I can't imagine not doing it if I were a client. It's also why 13-f's are popular. Imagine having that info in real time?

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What's the major differences in setting it up via traditional channels vs IB?

 

Someone suggested to me via PM to start as investment advisory instead of a full fledged HF manager. The cost would be much lower and I would only provide services to manage individual accounts. I log into their accounts and trade, instead of asking them to send me their money. This will be much easier to earn trust than asking people to send me money and just trust whatever I do with their money.

IB has an automated feature to support this and it sounds like it can automatically withdraw fees from client's account into my advisory master account.

 

I've considered this, but what bothers me is that the client can see all of the trades being made. What's stopping them from just copying everything you do in real time, while giving only a small amount of money? Also, I fear giving access to real time portfolio value, with all of its ebbs and flows can cause distress to a client, and in turn problems for the portfolio manager. I think this is why Buffett reported account value only once a year, but I might be wrong on that.

 

Not to mention that they will second guess you every step of the way.  Value investing often in practice means investing in the shunned and the ugly.  Your clients may be calling you every day asking you why you are holding what you hold.  Too much hand holding needed, in my opinion

 

I have invested some of my money with a manager who does the IB-managed-account thing.

 

I don't copy his trades.

 

I don't secondguess him.

 

So don't bark on the clients.  8)

 

One issue with IB setup from the client point of view might be the taxes. The trades and foreign currency exchanges that may be horrible to deal with at tax time if I can't get them automatically into TurboTax Online...

 

You are an enlightened client, Jurgis  :D

 

 

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