Question for those who manage a fund --(costs)

[LowIQinvestor]

Would appreciate any advice from those that have experience in launching and running a fund:

 

What were your startup costs?

 

What are your annual operating expenses?

 

 

Between accountants/audit, attorneys, prime broker, fund administrator, custodian etc., is it even feasible to launch a fund with AUM of around $5M?

 

 

Thanks in advance.

[racemize]

Startup costs: 20-30k

Operating Expenses (Very lean): 12k-20k

 

 

Definitely possible to launch at AUM of 5M, but don't expect to make much money at the beginning unless you have incentive fees and really great performance (which I don't think should be expected, generally).

[ukvalueinvestment]

There is a discussion thread on this on Value Investors Club - 13/2

[LowIQinvestor]

Startup costs: 20-30k

Operating Expenses (Very lean): 12k-20k

 

Thanks racemize,

Would you mind breaking down your operating expenses and service providers?

 

I am willing to run it very lean as a one man shop (no office needed). But an audit alone seems to be about $10K/year.

 

 

[BG2008]

Plain Vanilla PPMs can be done at $20-30K, I've heard some as low as $12K.  For customized documents with side pockets, gates, share classes, etc, it can easily be $40-50k.  Cost to form entities, fund itself, GP entities, management companies depend on how much entities you have.

 

Yeah, $12 to 20K for operating sounds about right.  You can get audits done for about $7.5k, another 2-3k for taxes, fund admin is minimally $500/month.  Those are entry level figures. 

 

PB doesn't really cost much, just use IB.  Throw in another $2-5k for attorney in case you have some ad hoc questions. 

 

If you can launch with $5mm, it's actually not too shabby.  Feasibility depends on your fee structure.  If you charge 0,6,25, you're living on performance fees which can be tough and unpredictable.  If you've got a management fee and the LPs pay for the operating expenses, you're looking at $50k/yr net to you @ 1% management fee. 

 

My word of advice is that "you will definitely be surprised by who gives you money and who doesn't" 

[racemize]

6-8k for audit

2k for taxes (small number of partners)

1500-2000 per quarter for administration

?k random filings/legal stuff

 

Also, +1 on "you will definitely be surprised who gives you money and who doesn't".  I was very lucky to have a group of investors who almost all came through, but I understand that is not typical.

[Parsad]

There was a very detailed thread on this subject not too long ago...maybe six months.  Might be useful!  Cheers!

[yadayada]

what kind of paperwork has to be done? Those are some ridicilous figures. I mean an audit should be really simple right?

 

Monthly admin fees also look pretty ridicilous. Most of the time, all you have to do is look in your brokerage accounts and see what went in and out, and what the balance is now? That all seems little work, and a lot of money?

[matts]

what kind of paperwork has to be done? Those are some ridicilous figures. I mean an audit should be really simple right?

 

Monthly admin fees also look pretty ridicilous. Most of the time, all you have to do is look in your brokerage accounts and see what went in and out, and what the balance is now? That all seems little work, and a lot of money?

 

It's not all about the work. You are paying a premium for the trust implied by the audit and 3rd party administration. The bigger the name, the higher the premium even though the work is essentially the same.

 

Sure, I can pay my cousin Sal 30 bucks to do my audit, but what value is that for my investors?

 

 

 

[Mephistopheles]

Depending on how well your initial investors trust you and the legal requirements of your state, it might be okay to skip the audit for say, the first year or two. After two years you will hopefully have a good track record, and people outside of immediate family/friends may become interested, but not without an audit. So you can do a retroactive audit of the previous years at that point to show these potential clients.

 

Just an idea. I've spoken with an audit firm about this and they said it's possible.

[yadayada]

cant you give them acces only to their account or something? So they can just check themselves. Seems like that could save you a ton of money. If IB integrates something like that..

[matts]

cant you give them acces only to their account or something? So they can just check themselves. Seems like that could save you a ton of money. If IB integrates something like that..

 

What do you mean by account? The OP is about a fund which would have an account in its own name. Investors would have units of ownership in the Fund.

 

What you are talking about is a managed account. Yes IB can give someone visibility, but you will have real problems convincing anyone outside your family and friends to invest like that. No audit, no administration, just look through into their account.  Again, that's not a fund.

 

 

[Guest JoelS]

I think this very much depends on what you mean by a "fund" - I have a friend who manages money, and his annual expense costs are basically nil after the initial legal work was set up - he does his own accounting, pays chips for brokerage, and works from home. If you have just a few investors, they trust you, and you provide candid investment updates every so often, why pay 30k on 5mil or 0.6% of AUM. That is a lot of money for work you can do yourself. Perhaps when you get to 30m or 50m? this would make sense.

[Tim Eriksen]

what kind of paperwork has to be done? Those are some ridicilous figures. I mean an audit should be really simple right?

 

Monthly admin fees also look pretty ridicilous. Most of the time, all you have to do is look in your brokerage accounts and see what went in and out, and what the balance is now? That all seems little work, and a lot of money?

 

I will agree with the figures thrown out so far.  We are charged $725 per month for admin, $12k per year for audit and taxes.  Start up costs were similar to those listed.  You will pay 2 to 3 times that for big name firms.

 

Admin is a lot more complicated than just looking at balances.  Admin tracks all capital inflows and outflows.  They allocate all income in the period based on realized ST or LT gains, unrealized gains, dividends, interest, etc for each client.  They track accruals for audit, admin, and dividends.  Their reports are what allow audit to be relatively cheap.  I would guess it takes 4-6 hours per month.  The rest of the cost presumably relates to the software to track everything.     

[BG2008]

I second Tim's point about the "value add" of fund admin.  One of the best advice from my attorney during the process is to go with a fund admin who really gets it.  Everything seems simple, until you have to start tracking your balance at month/quarter end, who added capital, who withdrew capital, what to value some of your illiquid/non-traded securities.  I couldn't be happier with my fund admin.  They are worth ever penny that I pay them.  It seems easy, until you have to properly accrual for expenses.  There were topics that came up that you only know when you've gone through the exercise. 

[PlanMaestro]

Anyone on this board with experience setting up a fund in Mexico or Chile, or knows someone who has?

[TwoCitiesCapital]

I second Tim's point about the "value add" of fund admin.  One of the best advice from my attorney during the process is to go with a fund admin who really gets it.  Everything seems simple, until you have to start tracking your balance at month/quarter end, who added capital, who withdrew capital, what to value some of your illiquid/non-traded securities.  I couldn't be happier with my fund admin.  They are worth ever penny that I pay them.  It seems easy, until you have to properly accrual for expenses.  There were topics that came up that you only know when you've gone through the exercise.

 

Just curious who your admin is...so I have a reference point in a few years if I go this route.

[LowIQinvestor]

Thank you everyone for your feedback.

 

If I ran a plain vanilla (long only-liquid equities) investment strategy it seems that it would be considerably less expensive to use a "managed accounts" structure. From what I understand, Interactive Brokers (and others), are able to allocate trades to multiple accounts. For example, if I want 10% of my portfolio in Citigroup, it will allocate that same % to all other linked accounts I manage.

 

In essence, this eliminates the need for an expensive audit, fund admin, accountants for K-1s, etc. Back of the envelope math seems to indicate one could run this for a few thousand dollars a year.

 

I guess the downside is that you need to register as an RIA, no performance fee (good for investors), and there is full transparency (might be a good thing?).

 

From a marketability standpoint, this structure seems much more attractive for the investor. Lower fees than typical hedge fund, capital in own account, no K-1s, no risk of fraud, etc...

 

Anyone here manage money this way?

 

 

 

 

[oddballstocks]

Thank you everyone for your feedback.

 

If I ran a plain vanilla (long only-liquid equities) investment strategy it seems that it would be considerably less expensive to use a "managed accounts" structure. From what I understand, Interactive Brokers (and others), are able to allocate trades to multiple accounts. For example, if I want 10% of my portfolio in Citigroup, it will allocate that same % to all other linked accounts I manage.

 

In essence, this eliminates the need for an expensive audit, fund admin, accountants for K-1s, etc. Back of the envelope math seems to indicate one could run this for a few thousand dollars a year.

 

I guess the downside is that you need to register as an RIA, no performance fee (good for investors), and there is full transparency (might be a good thing?).

 

From a marketability standpoint, this structure seems much more attractive for the investor. Lower fees than typical hedge fund, capital in own account, no K-1s, no risk of fraud, etc...

 

Anyone here manage money this way?

 

The landscape has changed for funds.  The rule on who you can charge management fees to has changed, the bar is higher.  So ask yourself, do you have enough people who are going to be qualified investors for whom you can charge a fee?  Remember you're still allowed to charge them a performance fee on a separate account as well.

 

Separate accounts aren't as "sexy" as running a fund.  If you care about the swagger and being able to say you run a hedge fund pay the costs.  Otherwise I'd say go the RIA route, it's cheaper and far easier to setup.  For the few high balance accounts you can charge performance fees, and if your great aunt maude wants to invest with you you'll be able to put her in some index funds and get paid for it.

 

This is where a fund makes sense, if you're dealing in esoteric non-liquid investments.  If so it becomes really hard to allocate them to different accounts.  In that case you want a single fund.  You said you're going to be doing long only liquid investments so I'd consider SMA's seriously.

 

Nate

[GregS]

Thank you everyone for your feedback.

 

If I ran a plain vanilla (long only-liquid equities) investment strategy it seems that it would be considerably less expensive to use a "managed accounts" structure. From what I understand, Interactive Brokers (and others), are able to allocate trades to multiple accounts. For example, if I want 10% of my portfolio in Citigroup, it will allocate that same % to all other linked accounts I manage.

 

In essence, this eliminates the need for an expensive audit, fund admin, accountants for K-1s, etc. Back of the envelope math seems to indicate one could run this for a few thousand dollars a year.

 

I guess the downside is that you need to register as an RIA, no performance fee (good for investors), and there is full transparency (might be a good thing?).

 

From a marketability standpoint, this structure seems much more attractive for the investor. Lower fees than typical hedge fund, capital in own account, no K-1s, no risk of fraud, etc...

 

Anyone here manage money this way?

 

The landscape has changed for funds.  The rule on who you can charge management fees to has changed, the bar is higher.  So ask yourself, do you have enough people who are going to be qualified investors for whom you can charge a fee?  Remember you're still allowed to charge them a performance fee on a separate account as well.

 

Separate accounts aren't as "sexy" as running a fund.  If you care about the swagger and being able to say you run a hedge fund pay the costs.  Otherwise I'd say go the RIA route, it's cheaper and far easier to setup.  For the few high balance accounts you can charge performance fees, and if your great aunt maude wants to invest with you you'll be able to put her in some index funds and get paid for it.

 

This is where a fund makes sense, if you're dealing in esoteric non-liquid investments.  If so it becomes really hard to allocate them to different accounts.  In that case you want a single fund.  You said you're going to be doing long only liquid investments so I'd consider SMA's seriously.

 

Nate

 

I think this is right on.  Certain strategies only make sense in a fund.  Outside of that, the SMA structure is way better for the client as they offer greater transparency and liquidity.  I think this can be a key selling point for many potential clients.  I do think more sophisticated investors, and particularly institutional investors, are going to want to see the kind of professional support that others have mentioned in this thread regardless of your firm's structure.  But if you want to balance cost, SMAs are probably the way to go.  If you are a total unknown, institutional money is a pipe dream anyway.

 

Leigh Drogen wrote a great post several years ago about this issue:

 

http://www.leighdrogen.com/the-hedge-fund-structure-is-dead/

 

Also, I think you have to register as an RIA if running a hedge fund.

 

[Mephistopheles]

What about the issue of carried interest? The article that GregS posted points this out. It might be worth it to dish out the extra money for a fund just to take advantage of carried interest. Thoughts?

[Tim Eriksen]

I second Tim's point about the "value add" of fund admin.  One of the best advice from my attorney during the process is to go with a fund admin who really gets it.  Everything seems simple, until you have to start tracking your balance at month/quarter end, who added capital, who withdrew capital, what to value some of your illiquid/non-traded securities.  I couldn't be happier with my fund admin.  They are worth ever penny that I pay them.  It seems easy, until you have to properly accrual for expenses.  There were topics that came up that you only know when you've gone through the exercise.

 

Just curious who your admin is...so I have a reference point in a few years if I go this route.

 

We use Unkar Systems out of Pleasanton, CA as admin. 

[Tim Eriksen]

Thank you everyone for your feedback.

 

If I ran a plain vanilla (long only-liquid equities) investment strategy it seems that it would be considerably less expensive to use a "managed accounts" structure. From what I understand, Interactive Brokers (and others), are able to allocate trades to multiple accounts. For example, if I want 10% of my portfolio in Citigroup, it will allocate that same % to all other linked accounts I manage.

 

In essence, this eliminates the need for an expensive audit, fund admin, accountants for K-1s, etc. Back of the envelope math seems to indicate one could run this for a few thousand dollars a year.

 

I guess the downside is that you need to register as an RIA, no performance fee (good for investors), and there is full transparency (might be a good thing?).

 

From a marketability standpoint, this structure seems much more attractive for the investor. Lower fees than typical hedge fund, capital in own account, no K-1s, no risk of fraud, etc...

 

Anyone here manage money this way?

 

I do some of both.  You need to know what your state requires in terms of compliance.  In my state you have a lot of paperwork that has to be completed for each client, such as tracking all trade orders (not just filled orders).  So unless you have a good software program, tracking 100 clients could be quite time consuming.

 

Transparency is a mixed bag - while it should give comfort to the client, some use it to "steal" ideas (they let you manage $100k while they duplicate much of the portfolio with a larger sum), others question every mistake and worry to much about the day to day.     

[GregS]

Transparency is a mixed bag - while it should give comfort to the client, some use it to "steal" ideas (they let you manage $100k while they duplicate much of the portfolio with a larger sum), others question every mistake and worry to much about the day to day.

 

Good points, Tim.  Do you have experience with clients stealing ideas?  How did you address it?

 

Anyone else encounter this?

[Tim Eriksen]

Transparency is a mixed bag - while it should give comfort to the client, some use it to "steal" ideas (they let you manage $100k while they duplicate much of the portfolio with a larger sum), others question every mistake and worry to much about the day to day.

 

Good points, Tim.  Do you have experience with clients stealing ideas?  How did you address it?

 

Anyone else encounter this?

 

I have had the experience.  It didn't make me particularly happy.  I had to live with it since the alternative would have been to terminate the relationship (which from a financial standpoint would not have been wise for me at the time).