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HowtostartaninvestmentfundQuora

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Howdoyoustartaninvestmentfund?
SoivereadmuchaboutinvestingandWarrenBuffett.Iwascurioushowwouldonestarta
fundlikeapartnershiplikebuffettdidandinvestotherpeoplesmoney?Itmaybe
somethingiwouldliketodoifiamsuccessfulatinvesting.Howmuchcapitalwouldit
require?Canistartonefromsomewheresuchasmyownhome?Idontexpecttohavea
massivehugefundthatwillhave5mAUMbutiloveinvestingandthisissomethingi
woulddefinatelylikepursue

6Answers
DavidMullings
14.8kViewsUpvotedbyNohJoonChoo,BerkshireHathaway&WarrenBuffettSME

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Editedtoaddsomecostsonthelegalside.

HowdoIstartanacceleratororinvestmentfund?

Startinganinvestmentpartnershipisquiteeasyandinexpensiveunlikestartingahedge
fund,especiallysinceyouarefocusedonwhatWarrenBuffettfirststartedwith.

Howcanistartahedgefundaftercollege?

It'slaidoutprettyclearlyinTheSnowballEffectandfewregulationsorlawshavechanged
butsomecostshavegoneup.HavingresearchedBuffett,partnerships,etcformanyyears
andhavingstartedaprivateinvestmentfirminthepast,Icansharemyviews.
Youneed3keythings:
1)Alawyertodraftthepartnershipagreementtemplateandregistereachpartnership
Ourmainlawyercharges$650perLLCwecreateincludinggettinganEINfromtheIRSso
wecanopenbankaccounts(allpaperwork,filingfeesandcustomoperatingagreement
included).
Hisretaineris$2,500sowecouldcreateafewLLCsorpartnerships.IfitisoneLPthenhe
wouldbillusforhistimetocreatesend,collectandfiletheagreementsforeachpartnerin
theLP.
ArealisticcostperLLCis$850sofactorthatintotheminimumamountofmoneyyou
wouldacceptforapartnership.Ifyouwanttosavemoneythenyoucandoeverything
yourselfusingLegalZoomandtheIRSwebsitefor1/3thecost,minusthelegaladviceof
course.
Ourlawyersworkingonafundoffundswearesettinguphavearetainerof$10kbutare
"brandname"andhave15officesaroundthecountry.Thiswouldbeunnecessaryforyou
atthispoint.
2)Abrokerageaccounttotrade
3)Anaccountanttoprovidefinancialreportsfortaxpurposes
Noneoftheseareexpensiveandoverheadcanbeextremelylow.Thenextstepsareto
figureoutwhatlegalstructurethepartnershipstake,yourpitchandwhatyourfee
structureis.
Buffettstartedoffwithonepartnership,BuffettAssociatesltd.andhad6partners.Instead
ofaddingpartnerstotheoriginalpartnership,hecreatednewonesandendedupwith
some7otherpartnershipsbecauseeachpersonheacceptedcapitalfromwasfora
partnershiponlybetweenhimselfandthem.
Location
Buffettworkedfromhomeandyoucantoo.Youcouldevendeducttheportionofyour
mortgagethatcoversyourformalofficespace(rulesarefairlystrict).

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Hekeptexpenseslowforalongtimeandpoureditintomorestocks.Youaren'ttryingto
impressanystrangers.Yourtrackrecordandrecommendationsfromexistingpartnerswill
driveyourAUMgrowth.
LegalStructure
ItisfairlyeasytosetupanLPforeachpartnershiporanLLC.AnLPwouldrequireyouto
setupaGPGeneralPartnerfirmthatisactuallymanagingtheLPs.Itwouldbeyour
maincompanythatisthepartnerwitheachofthepeopleyouwillmanagemoneyfor.
TheLLCroutecouldbeyouasanindividualmemberwiththepartnerineachLLCoryou
createacentralLLCforyourselfthatisamemberofeachLLCpartnership.
TheOperatingAgreementfortheLLCwouldneedtoexplicitlyoutlinethedecisionmaking
roleofyouvstheothermember,thecompensationstructure(howprofitisdividedandany
managementfeespaidtoyouguidedbyyourdecisionfurtherdown).
ThememberLLCscouldjustpaythemanagementfeetothemainLLCandyoujustworry
abouttheupsidesplitifyoudochargeafee.
Regulationsandregistration
YoudonotneedtoregisterasanInvestmentAdviserwiththeSECbecauseyouwouldhave
lessthanUS$25minAUM.
Youmayneedtoregisterwithyourstateandalawyerwouldguideyou.
Itiscriticalthatyoudonotpubliclyofferpartnershipinterestsandnotexceed100
membersinthepartnershipsothatyoubenefitfromtheSECexemptionforprivate
investmentcompanies(Isetuponeafewyearsago).
Managementfees
Thisisthemostcriticaldecisionyouwillmakebecauseitdeterminestheeconomicsof
runningthisasabusinessorahobby.
AccordingtoBuffettinTheSnowballEffect,hereceived50%ofthegainsabovea4%
thresholdotherwisecalledahurdlerate.Healsodidnottakeamanagementfeeasa
percentageofAUMandwasliablefor25%oflosses.
Thiswouldbeunprecedentedtodayanddefinitelyisnotexpected.Thefundmanagement
industrystandardispresently2and20whichmeans2%managementfeeperyearof
AUMand20%ofupsideabovethehurdlerate.
EachfundmakesadjustmentsandthesensibleapproachbasedonBuffett'soriginalwould
bea0and35whichmeansnofeesand35%upsideabovethehurdlerate.Notethatthis
rateiscriticalandyoucannotsetittoohighoryouwillincuralossforfartoolong.
Buffettnolongerhasasethurdleratebutinsteadmeasureshimselfagainstthemarket.
Mosthedgefundshoweverhaveatargetyieldanddonotjustfocusonthemarket.
Iwouldrecommend6%asyourbenchmarkmainlybecauseoftheriskfreeratesoncapital
yourpartnerscouldgetplusapremiumfortherisktheyaretaking.Ifyouaren'tconfident
youcandeliverbetterthan6%fortheyearthenyoushouldn'tbeactivelyinvestingfunds
forothers.
WithnomanagementfeelikeBuffettyouwillneedtokeepcostslowattheoutsetand
coveryourlivingexpensesfromothermoney(savings,job,etc).Thepartnerswilllikethat
alloftheirmoneygoestoinvestmentsandnotlawyersoryourpockettomanagethe
money.
Strictlypayforperformance.
Quickmath:
AUM=$100k
Hurdlerate=6%
Performance=10%
Yourcompensation=$1,400
Notethatthisisfor1yearofinvesting$100kforothers.Nowyouseewhyfewpeoplestart

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somethingthissmallaswellasusuallychargeamanagementfee.Itisstillawaytostart
buildingatrackrecordthough.
Buffettwasalreadywealthywhenhestartedandhealsohadatrackrecordofdoubledigit
returnssoheknewthatcompoundingwouldquicklygethimtoreasonablescale.
Toearngrossrevenueof$50kperyearbeforetaxes(whichshouldbethelowercapital
gainstaxesplusdeductionsforbusinessexpenses)youwouldneedtohaveAUMof
$1.43m.
Thisisdoableandprovesthatyoucouldhaveaninvestmentpartnershipwith$2.5m$5m
undermanagement,chargenoupfrontfeesandstillmakeagoodliving.
It'snotwhatmostpeopleintheinvestingworldareaimingforbutnoteveryone
needs/wantstoattractinstitutionalinvestorsorcompetewithhugehedgefunds.
Mypersonalrecommendation
Don'twaituntilyouhave$100ktostart.Keepyourdayjobandtakethefirst$5kor$10k
fromafriendorfamilymemberandgetgoingnow.
Buildthetrackrecordonesmallstepatatimeandletthereturnsspeakforthemselves.
Sustainablescalecomeswithdeliveringreturns.
Don'tfocusonthelossyouareincurringatthestartbecauseitisalongterminvestmentin
yourfutureandeverybusinesshassomestartupcosts.Dohowevertrytogetscalewithin2
yearssoyoucanfocusfulltimeoninvestingthefunds.
Your2yeartargetis$2.5mAUM(incaseyoufall50%shortyouarestillabovea$40kper
yearincomeallthingsbeingequal).
Bepreparedforthestressofmanagingotherpeople'smoneyandtheseriousresponsibility
thatcomeswithit.
DefinitelykeepstudyingBuffettandhisfrugalapproach.
WrittenDec24,2014ViewUpvotes

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MoreAnswersBelow
Howwouldyoustartawebbasedinvestmentfund?
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HowcanIstartmyowninvestmentfundlikeWarrenBuffett'sfirstfund?
AbieKatz,AssociateatCrunchFund
6.6kViews

Thisguide:http://www.businessinsider.com/a... writtenbyoneofthePartnersat
GreycroftgoesintosomedetailaboutthedifficultiesofraisingaVCfund...itisdefinitely
wortharead.
Thehardestpartofraisingafundisconvincingwealthyindividuals,endowments,fundof
fundsorothersourcesofcapitalthatyouarecapableofprovidingaboveaveragereturnsas
anemergingmanager.Structurewisecheckout:http://www.theventurealley.com/h...
andhttp://wiki.answers.com/Q/How_to...
UpdatedNov27,2011ViewUpvotes

RichardStanton,Soccerandcyclinglovingfinanceguy
4.7kViews

Theminimumsizeoffundthatwillcoveritscostsisabout$50,000,000howeveryouare
goingtostruggletogetanyonetotakeafundofthatsizeseriouslytoinvestin.

https://www.quora.com/Howdoyoustartaninvestmentfund

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5/20/2016

HowtostartaninvestmentfundQuora

Whenwesetupahedgefundwegotalittlechangeoutof$250,000butthatwasalmost10
yearsagosoyou'dneedmoremoneynowIguessasregulationshavebecomemore
complex.Howeverwedidhavequiteacomplexstructurewith6classesoffundpeople
couldinvestinacross2currencies.WewerealsolistedontheIrishstockexchange
(cheaperthanLondonorNewYork).
Theownerpaidthatupfrontandwethenamortisedthestartupcostsover5yearsand
chargedthemtothefundswhichisallowedunderCaymanIslandlaws(thefundswereCI
basedalthoughthemanagementcompanywasbasedinLondon).
Inadditiontothat,themanagementcompanyneededtobecapitalisedsothatitcould
continuetorunifitdidn'tmakeaprofit.Asapartoftheregulationswehadtostresstest
themanagementcompanytoseewhatwouldhappenifinvestorswithdrewtheirmoney.
Theownercapitalisedthemanagementcompanywith1,000,000.Wewereover
capitalisedreallythough,wecouldhaveoperatedwithaquarterofthatIreckon.
Togetpeopletoinvestyourealisticallyneedatleasta3yeartrackrecordandpriortothat
youwillneedseedmoneytoinvesttogetatrackrecord.Asyouwillneedtopayyourcosts
fromthemoneyyoumakeonthatseedmoney,realisticallyyou'llneedsomethinglike
$25,000,000sothatyourinvestmentprofitsareenoughtopayforBloombergterminals,
IT,officespace,custodyfees,auditfees,backofficewages,regulatorfees,directorsfees,
brokerageetc.Youcanonlyskimpsofaronthatstuffbecauseanyinstitutionalinvestoris
goingtowanttoseeevidencethatyouareaproperoutfitaspartoftheirduediligenceand
regulatorsrequireacertainstandardofinfrastructure.
Soyouprobablyneedabout$6700ktocapitalisethecompanyandpaylegalfeesetc.
Thenyou'llneedaninvestorwith$25,000,000togetyouatrackrecordifyou'rehappyfor
thecompanytorunatalossfor3yearsor$50,000,000ifyouwantthecompanytobreak
even.Eventhenyouwon'tbeearninganymoneyatallforthefirstthreeyears.
Goodluckwiththenewventure.I'dbeinterestedtoknowhowyougeton.
WrittenDec23,2014ViewUpvotes

RisheshSingh,FullTimeStock&OptionTrader
1kViews

Wellthere'sseveralaspectsthatneedtobeaddressedwiththatquestion
Thenatureofyourfundwhatwillyoubeinvestingin?
Thelegalaspectsyou'dliketodealwithite.g.whereit'sregistered
Whereandwhoyou'regoingtobegettingcapitalfrom
Anothernatureaspect,buthowyou'llbedoingtheinvestinginwhatyou'llbe
investingin
Thoseareallquestionsthatyou'llneedtoaddress.Intermsofhowtodoit,here'sagood
starttogettingtheinfo:HowToLegallyFormAHedgeFund|Investopedia
WrittenMar16

AlanTegroen
3.3kViews

Thedifficultpartisobviouslyobtainingtheinitialcapital.Thegoodnewsisthatifyoucan
convincefamily,friends,businessassociates,etc.toinvestinyou,thenyoucanstarta
fund.
Openabrokerageaccount,acceptinvestments,andtradethem.Ifyouarelookingtomake
thisalegitimateoperationyouwillwanttofileasaLPorLLCtoshieldliabilitiesa
professionalformationcancostupwardsof$30kwhileacheapjobcanbedonearound
$3k.
Regardingamountofmoneyyouneed,ittotallydependsonyoursituationandneeds.
Marketindexedfundswilltypicallyreturn5%to15%.Usethisasaroughpredictorofthe
moneyyou'llmake(i.e.100Kinitial=5kto15kreturn).Clearlyalivingcan'tbemadeoff
aninvestmentofanylessthanmaybeahalfmillion,butgoodreturnsatlowerthresholds

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mayconvincemorepeopletoinvest.
Goodluck...
WrittenDec23,2014ViewUpvotes

JamesTrefethen
2.3kViews

TostartamutualfundintheUnitedStates,youwillneed$100,000ininvestedcapital.
YouthenhavetofilethenecessarypaperworkwiththeSEC.Note:Economiesofscaleare
notreachedwithafundofthissize.Yourfundneedstoreach$10millionormorebefore
youcanadequatelycoverthefixedcostsofadministrationandsuch.
Forayoungfund,attractinginvestorstoreachcriticalmassisverydifficult.It'seasier
whenyouhaveagoodtrackrecordbutthattakestime.
WrittenDec7,2014

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