Setting up an investment fund - need some advice

[JBird]

I think much of that has to do with the fact that generally, only the lower-quality funds accept FOF money.  Like most of the industry, FOF money is fickle and short term.  An excellent value manager will know this, and not wager the integrity of their fund on the high chances the FOF manager decides to redeem after a "bad" quarter.

 

 

I run a small registered investment adviser just for separate accounts, and would like to start an LP fund when my Masters is complete in a year or so.  My compliance guy doesn't do funds but would update my Form ADV.  Since I'm already registered, I imagine the first steps are LP setup (easy), then having a law firm draft the PPM, LPA and other offering docs, and then figuring out admin procedures, CPA audit and prime brokerage.  The $20k quotes seem high - what is the breakdown there?  Is most of that for the offering docs?  I probably spent about $5k all-in to get the RIA up and running.

 

What's the upside with the LP fund you don't get with the SMA structure as an RIA?

[oddballstocks]

I think much of that has to do with the fact that generally, only the lower-quality funds accept FOF money.  Like most of the industry, FOF money is fickle and short term.  An excellent value manager will know this, and not wager the integrity of their fund on the high chances the FOF manager decides to redeem after a "bad" quarter.

 

 

I run a small registered investment adviser just for separate accounts, and would like to start an LP fund when my Masters is complete in a year or so.  My compliance guy doesn't do funds but would update my Form ADV.  Since I'm already registered, I imagine the first steps are LP setup (easy), then having a law firm draft the PPM, LPA and other offering docs, and then figuring out admin procedures, CPA audit and prime brokerage.  The $20k quotes seem high - what is the breakdown there?  Is most of that for the offering docs?  I probably spent about $5k all-in to get the RIA up and running.

 

What's the upside with the LP fund you don't get with the SMA structure as an RIA?

 

Performance fees?

[Philip Morris IV]

Correct - fee incentive.

 

SMA has to do 1% flat, can't have performance or hurdle.  With LP can do 0/25 with annual hurdle/high water mark.

[Tim Eriksen]

Correct - fee incentive.

 

SMA has to do 1% flat, can't have performance or hurdle.  With LP can do 0/25 with annual hurdle/high water mark.

 

You are either mistaken or under very unusual state regulation.  An SMA can charge reasonable fees.  In my state anything up to 2% is still considered reasonable.  Higher than that you get some backlash.  SMA's are also not precluded from incentive fees either as long as the client is accredited. 

[Philip Morris IV]

You are correct, I misspoke.  I was speaking personally.  Looking back my wording was misleading, sorry!  :)

 

The incentive I didn't consider, although I imagine outside of a partnership you would lose the carried interest tax deferral.

[DukeCrow]

Correct - fee incentive.

 

SMA has to do 1% flat, can't have performance or hurdle.  With LP can do 0/25 with annual hurdle/high water mark.

 

You are either mistaken or under very unusual state regulation.  An SMA can charge reasonable fees.  In my state anything up to 2% is still considered reasonable.  Higher than that you get some backlash.  SMA's are also not precluded from incentive fees either as long as the client is accredited.

 

Performance fees for RIAs depends on the state. Some require the investor to be qualified not accredited. I believe the SEC requires the client to either have $1 million invested or $2 million net worth.

http://www.sec.gov/rules/final/2012/ia-3372.pdf

[GrizzlyRock]

When I was getting started I did a simple "incubator" fund with minimal paper work and WAY less costly the $20K.  Then if/when you roll over in to a "real fund" as defined by charging fees and accepting outside money (not including your buddy) you build out the full HF docs etc

 

I went with these guys and have bee a client noe for 3+ years: http://www.investmentlawgroup.com/contact-us  Good guys at reasonable cost -

 

Ask for Andrew Kalt and feel free to reference me by the way (Kyle at GrizzlyRock)

[LC]

When I was getting started I did a simple "incubator" fund with minimal paper work and WAY less costly the $20K.  Then if/when you roll over in to a "real fund" as defined by charging fees and accepting outside money (not including your buddy) you build out the full HF docs etc

 

I went with these guys and have bee a client noe for 3+ years: http://www.investmentlawgroup.com/contact-us  Good guys at reasonable cost -

 

Ask for Andrew Kalt and feel free to reference me by the way (Kyle at GrizzlyRock)

 

Thank you!

[abitofvalue]

When I was getting started I did a simple "incubator" fund with minimal paper work and WAY less costly the $20K.  Then if/when you roll over in to a "real fund" as defined by charging fees and accepting outside money (not including your buddy) you build out the full HF docs etc

 

I went with these guys and have bee a client noe for 3+ years: http://www.investmentlawgroup.com/contact-us  Good guys at reasonable cost -

 

Ask for Andrew Kalt and feel free to reference me by the way (Kyle at GrizzlyRock)

 

thank you. this is useful..

[tnp20]

So spoke with a whole bunch of attorneys since I started the thread.

 

We are going with Brent Gilette of InvestmentLaw group...professional, reasonable prices and been in the business for a long while so knew a lot of stuff and options.....

[tnp20]

I won't mention names but we got very different flavors in talking to the various Law Firms. What is right for you depends on your circumstances so I am not making a blanket recommendation on the InvestmentLawGroup, but they seemed best fit for us.

 

There seems to be a circle of attorneys, administrators, managers, accountants, auditors that know each other and have been doing business with the same clients for a while so when one of them asks who we are thinking of going with and we mentioned a few candidates, they either are in the circle or outside it and relatively new.

 

Some firms practice just Investment Fund/Hedge Fund/Incubator Fund setup as their core business and have the process down to a fine art - Others have this component as a smaller part of their overall financial industry legal practice. That other component that they offer is what will make the difference if your fund structure needs additional help beyond just a basic setup.

 

Costs varied. For an incubator type fund, we got a quotes of roughly $4000- $10,000. It varies because if the operating agreement between the founding partners is complicated, more billable hours will be chewed up , but if your operating agreement is boiler plate with few mods, you are looking a the lower end of the cots. This fee is all inclusive and includes the state filing fees - in our care Delaware fees are ~$800.

 

Once you have established a performance track record, you will want to open the fund up to outside investors. The PPM and other stuff needed to do this will cost approximately $15-$20K. This is additional cost that will be incurred down the road when you want to open it up to outside money.

 

The other important question for us is whether we needed an audit it and have a administrator/manager/accountant.

 

For Audited performance - you are looking at $7000-$25K depending on the brand name of the firm. There is a cheaper option called Performance Tracking Table which will costs $2000....this may be good enough to sell your track record to outside investors - but some institutional clients may need fully audited results.

 

For Account management/Administration - you are looking at less that $1000 per month - they keep track of client accounts and mail out statements etc. Initially, for incubator, you are unlikely to need this.

 

 

Thanks for all of those folks on this board who helped us get started. Much appreciated. If there is specific experience that folks are looking for, I'd be happy to share my perspective to return the favor to the board, though I won't mention any names - just the nature of the experience.

[stahleyp]

thanks for the input tnp.

 

Kyle, were your incubator fees in the $4,000 area, too?

 

[oddballstocks]

I won't mention names but we got very different flavors in talking to the various Law Firms. What is right for you depends on your circumstances so I am not making a blanket recommendation on the InvestmentLawGroup, but they seemed best fit for us.

 

There seems to be a circle of attorneys, administrators, managers, accountants, auditors that know each other and have been doing business with the same clients for a while so when one of them asks who we are thinking of going with and we mentioned a few candidates, they either are in the circle or outside it and relatively new.

 

Some firms practice just Investment Fund/Hedge Fund/Incubator Fund setup as their core business and have the process down to a fine art - Others have this component as a smaller part of their overall financial industry legal practice. That other component that they offer is what will make the difference if your fund structure needs additional help beyond just a basic setup.

 

Costs varied. For an incubator type fund, we got a quotes of roughly $4000- $10,000. It varies because if the operating agreement between the founding partners is complicated, more billable hours will be chewed up , but if your operating agreement is boiler plate with few mods, you are looking a the lower end of the cots. This fee is all inclusive and includes the state filing fees - in our care Delaware fees are ~$800.

 

Once you have established a performance track record, you will want to open the fund up to outside investors. The PPM and other stuff needed to do this will cost approximately $15-$20K. This is additional cost that will be incurred down the road when you want to open it up to outside money.

 

The other important question for us is whether we needed an audit it and have a administrator/manager/accountant.

 

For Audited performance - you are looking at $7000-$25K depending on the brand name of the firm. There is a cheaper option called Performance Tracking Table which will costs $2000....this may be good enough to sell your track record to outside investors - but some institutional clients may need fully audited results.

 

For Account management/Administration - you are looking at less that $1000 per month - they keep track of client accounts and mail out statements etc. Initially, for incubator, you are unlikely to need this.

 

 

Thanks for all of those folks on this board who helped us get started. Much appreciated. If there is specific experience that folks are looking for, I'd be happy to share my perspective to return the favor to the board, though I won't mention any names - just the nature of the experience.

 

So for a startup fund that's going to accept outside capital, have a real auditor, and decent platform I'm seeing costs in the $35-50k range, plus about $12k in ongoing platform costs per year.  This is similar to other numbers I've heard in the past, this is good verification for myself that what I'd heard was reasonable.

 

In an ongoing basis $12k for platform, and say $12k for audit and $6k for misc expenses, so about $30k at a bare minimum to operate a fund.  That means that the fund would need at least $3m in AUM to cover costs, not including a manager.