What Are the Steps Required to Set Up a Forex Hedge Fund?
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.