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Forming a Trading Entity (?)

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I wanted to start a thread about forming a trading entity. I know the first step to this process is being consistently profitable. I know many on this site are indeed "trading for a living". I have been reading some info on a few of the traders accounting sites such as http://www.greencompany.com

 

For those of you who have done this, could you give some of the steps that you took as well as the reasoning behind it. And for those who have decided not to, what made you decide your route?

 

I think this could be a very helpful thread as trader's move up the ranks of professional trading.

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Should be an interesting thread. I imagine alot comes down to personal goals and if you really want to deal with the headache of OPM and the tax spaghetti.

Once my account has reached a certain level with a certain number of years of experience I plan on either starting an incubator fund or a small CTA fund but not take any money outside my family.

Its interesting if you look on autumngold.com that some funds are only 100-200k with a 50k min investment. I imagine these guys are basically just trading behind the entity to build a track record in the event they are quite successfull. To me at a certain level of profitability it just makes sense to setup if your profits far exceed the cost of running the fund. Even if you didn't think you would want to trade OPM at least the structure would leave a legit track record behind to leave that door open for the future.

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Good thread 404. In my experience, it really comes down to what your goals are. For example, if you want to trade OPM (other people's money), you'll almost certainly want a formal setup. If you just want to trade friends/family, there are ways to structure that as well.

 

The key is finding good, competent advisers. Make no mistake, just b/c you see CPA or Lawyer, etc. after a person's name does NOT mean they are a good resource for building your biz. You need someone that has experience in this field, as you've seen on green's site.

 

This could become a great thread IF a qualified person (such as from Green) could visit and chime in. I'm sure James would be ok with a person from a reputable firm offering their advice here.

 

Just remember there is no one size fits all and a qualified professional in this field may not be the local account or attorney. This is very much a niche market.

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Managing OPM is a very messy, competitive business - ignoring the attracting funds to manage part, you have significant regulatory requirements to meet before hand.

 

For those of you who have done this, could you give some of the steps that you took as well as the reasoning behind it. And for those who have decided not to, what made you decide your route?

 

I chose to trade for a firm instead of this route. At the most basic level, assuming you are a trader, I fail to see why you would want to take a 3% fee for the money you are managing, compared to 50%-90% cut of your own trading profits, using a firm's capital. The decision really comes down to your own goals and trading style.

 

 

A good friend of mine IS establishing a fund. Again, at the most basic level his reasoning:

- He is legally qualified from his prior background to manage money.

- His trading approach is a specific, low beta approach.

- He does not have any interest (or ability) to day-trade/short-term position trade.

 

If you do the math, assuming your trading style is scalable for a fund and also would be supported at a prop. firm (i.e. Not just being long/short positions for months) the point at which it is better to earn < 10% return on X dollars, compared with > 50% return on Y dollars is a LOT of dollars. X needs to be at a minimum 5:1 greater than Y. The question becomes what is easier for you - gaining access to 1,000,000 equity at a firm, or being given 5,000,000 to manage.

 

I would argue that being a successful trader is much simpler, but much harder. You can literally travel the world without a resume / CV, just your track-record. You are a licence to print cash for ANY firm.

 

SMW

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Good thread...

 

I am a small time trader with a j.o.b. to pay my bills. I day trade the YM 3 days a week on average. I have started looking at the tax issues and there is so much advice out there it is hard to filter what is really needed and what is just sales pitches to get you to form single and even multi-entity structures. Like you have said, hopefully someone with some experience will chime in with some advice.

 

BTW this is my first post but have been lurking around for a while. Hopefully I have found a site with good posts and info without all the negative remarks and banter.

 

Stephen

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Managing OPM is a very messy, competitive business - ignoring the attracting funds to manage part, you have significant regulatory requirements to meet before hand.

 

 

 

I chose to trade for a firm instead of this route. At the most basic level, assuming you are a trader, I fail to see why you would want to take a 3% fee for the money you are managing, compared to 50%-90% cut of your own trading profits, using a firm's capital. The decision really comes down to your own goals and trading style.

 

 

A good friend of mine IS establishing a fund. Again, at the most basic level his reasoning:

- He is legally qualified from his prior background to manage money.

- His trading approach is a specific, low beta approach.

- He does not have any interest (or ability) to day-trade/short-term position trade.

 

If you do the math, assuming your trading style is scalable for a fund and also would be supported at a prop. firm (i.e. Not just being long/short positions for months) the point at which it is better to earn < 10% return on X dollars, compared with > 50% return on Y dollars is a LOT of dollars. X needs to be at a minimum 5:1 greater than Y. The question becomes what is easier for you - gaining access to 1,000,000 equity at a firm, or being given 5,000,000 to manage.

 

I would argue that being a successful trader is much simpler, but much harder. You can literally travel the world without a resume / CV, just your track-record. You are a licence to print cash for ANY firm.

 

SMW

 

 

Good points SMW; however.... managing OPM can be VERY lucrative. Much more lucrative than your personal deal at a prop.

 

And that's what managing OPM is about - MONEY. AND MORE OF IT.

 

Think of it like this - if you can do what you are doing now and just trade much bigger sizes, why not? A 3 pt trade on the ES is 3 pts no matter if that's on 5 or 500 contracts. Only difference is the amount of zero's behind the P&L.

 

I think you've painted a very bleak picture of OPM and it's simply not the case. If you find competent advisors (key word competent) it's not that bad at all. It depends on how much you personally want to do vs. paying someone else to do it.

 

And not to mention, there are MANY tax, retirement, etc advantages to running a fund and/or CTA setup for you and the clients.

 

It's really about whether or not you want to scale your trading up or not. That's it. It's much easier to become personally wealthy trading 500 ES contracts vs. 5. ;) Of course, you have to be able to make money at it too.

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Good points SMW; however.... managing OPM can be VERY lucrative. Much more lucrative than your personal deal at a prop.

 

And that's what managing OPM is about - MONEY. AND MORE OF IT.

 

Think of it like this - if you can do what you are doing now and just trade much bigger sizes, why not? A 3 pt trade on the ES is 3 pts no matter if that's on 5 or 500 contracts. Only difference is the amount of zero's behind the P&L.

 

I think you've painted a very bleak picture of OPM and it's simply not the case. If you find competent advisors (key word competent) it's not that bad at all. It depends on how much you personally want to do vs. paying someone else to do it.

 

And not to mention, there are MANY tax, retirement, etc advantages to running a fund and/or CTA setup for you and the clients.

 

It's really about whether or not you want to scale your trading up or not. That's it. It's much easier to become personally wealthy trading 500 ES contracts vs. 5. ;) Of course, you have to be able to make money at it too.

 

I'm not really biased towards one or the other.

 

I was illustrating it is a lot harder to get hold of OPM, and I don't really think it is worth it until your in a bigger league.

 

Most of the successful traders who go into managing OPM is because of the reasons I stated. They either 'hit their head' on the limit through prop, or have a trading style not suited to prop. They also want to do different things - run long positions, short term positions, options, etc. When you start getting too big and too complicated, you need a whole firm just to manage "you". You need more than a risk manager split between all the other traders at a prop. firm, you need your own risk manager, your own admin, etc.

 

The 'limits' you would run into at prop would be greater than 1000 ES. The biggest traders in the office I used to be at in London had limits of 4000 Bund contracts. 4000 not enough for you? Then yes, head over to manage OPM.

 

I guess it depends on your own local tax laws, but in London the tax situation is basically the same.

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