TL;DR I went through this over the Summer. Maybe my experience will help. Which is basically use managed accounts instead of the Hedge fund route. And it is Crypto focused so I'm sure Tradfi might have differences.
The first big reason was legal costs for a hedge fund can get close to $100,00 each managed account is only $1,000-$1,500 in BVI, up to $5,000 if you add expensive lawyers (not 100% necessary) …
I had a couple of main investors who are really worth having so didn't really need the HF expense. So I reduced costs and used managed accounts for them. Sure, you can have up to 500 people in a hedge fund (3c7, not 3c1 which is 100), but even then the economies of scale won't kick in very fast because your costs for the hedge fund/onboarding each new investor climb with size, and managed accounts could still be cheaper.
What is the difference here? Well-managed accounts are just making a company (£7 in the UK, but ideally in a tax-free jurisdiction, which can still be sub 1k if you do it right), the client owns 100% of the company. They can pull their cash much like any company they own. The trick is that you are made the CIO and get paid a salary (management fee) and performance-based bonus Which is your performance fee). You can bake in all the normal lockups and can use sub-accounts efficiently to maintain exchange fees. In this scenario, you just have an employment contract.
This is why you see many hedge funds with advisors in their name. They build custom-managed accounts for their investors. This is a GREAT way to justify higher performance fees as well since your solution is “custom” but more likely just a combination of standard strategies.
Many clients will prefer this because there is more flexibility and transparency, although a good bit of hedge fund legal advice is don’t be special. Always make sure you do whatever is standard.
Trying to be extra transparent/ non-standard terms looks more suspicious/ inexperienced and hurts you more than it helps…
There are plenty of DAOs etc with tons of capital, but most funds can’t take them/ they have unique needs to keep most of the funds on-chain. You can of course transfer a certain % to a CEX, execute, send it back, and you’ve now got a way to serve this underserved market whisky avoided legal issues as each managed account is effectively separated and investors don’t have legal risks from DAOs being in the same fund as them.
Starting a fund is expensive, especially in crypto. If you trade a decent bit it goes higher. Multiply whatever Google tells you for each cost by about 5x to account for these facts. Crypto funds are nasty in legal costs.
Doing managed accounts saves money, saves time/headaches, increases the value to investors, and overall is a clear-cut better choice…
This is a lesson I had to learn the hard way a few years ago, but anyone doing managed accounts will tell you this same case. People get lured into thinking HFs (3c7/3c1) are standard (which they are a little), but they aren’t the only (or even optimal) choice.
Go at it, they’re cheap anyways!
Submitted November 18, 2022 at 07:13AM by KappaTrading https://ift.tt/rt5P3Fi
