Before explaining the sitution I want to give a quick disclaimer: No, I am NOT starting my own hedge fund, or soliciting employment opportunities I was wondering if anyone had any good resources on forming an investment partnership. I want to accomplish two things: 1. Circumvent the headache of managing small sums of money for a few friends. 2. Establish an investment vehicle with a verifiable track record seperate from my personal account. A number of my friends have discussed the possibility of giving me funds to manage on their behalf. I already accepted a nominal sum of money via check but want to establish a more formal process to help me deal with potential tax issues and prevent me from running off with their money (j/k). If anyone has done this - bare bones - what would be a ballpark figure for forming an investment partnership. I assume a partnership agreement, along with a subscription agreement is required in addition to getting registered. Any feedback is appreciated. Thanks!
I’m curious to know as well of any resources out there to form some sort of LLP or LLC.
funny how you mention that, I have a friend that works there.
You can’t form an LLP, unless you’re a lawyer or something (at least in Canada). I have looked into this, but I don’t want to mislead you since I was planning to start one in Canada. The entity would either be a general partnership (what investment clubs use), a limited partnership or a limited liability company (as you yanks call it)
why not start an investment club account?
we might want to start there (as a joint account), but like what the original post had suggested, we would want to move to something a bit more formal than that.
the setting up of the partnership is the easy part in my opinion, its the accounting that is going to get you all screwed up. Money in, money out, striking a unit value for the people in the fund. You could set up as an LLC or something, each individual opens their own account (you do it), and just trade them like a matrix. This is a very valid question as I am getting friends/family that continue to ask about giving me money cuz I am such a rockstar
It’s a good question Frank, but I think if you start an investment club account, then other participants in the club have a right in the investment decision-making process. I know that ValueAddict has skill and is probably looking more to set up a limited partnership with passive limited partners (that can solely provide capital) rather than have partners that influence investment decisions.
AliMan - that is correct. As investment club you give all club participants the right to decide on investments. Which defeats the whole purpose since I want full discretion. Most of the assets in the account will be mine FYI. I checked out some info on legal zoom. Apparently a partnership needs two or more people. Who’da thunk. Maybe I’ll send out one of those e-mails: “Hi my name is Ching-Lang from Vietnam. I am writing to inform you that you have been chosen to become a silent partner in XXX LP. Please respond with your full legal name, address, and DOB (bank account not necessary).” tvPM there is also a question of liability. The GP is exposed to unlimited liability so an LLC may have to be formed? Gee I wish this was part of the CBOK. Setting up end of month contributions and withdrawals may uncomplicate the accounting matters.
agree completely on monthly liquidity. That limits how often you need to value it as well making ops a lot easier. I think most firms would be set as an LLC or Corp, then setup the partnership under it. think ValueAddict, LLC is the company, then Value1 is a partnership where ValueAddict, LLC is the GP and the individuals are the LPs. That way you can start numerous partnerships over time all under the LLC umbrella.
What tvPM said is something my friend and I considered. However, it’s considerably more expensive (the cost of running an LLC) than simply running a limited parternship. You can always write a clause in the partnership agreement that the general partner can be changed in the future. The partnership agreement has a lot of freedom, and hence I got to the point that I needed mine to be reviewed by a lawyer (which I haven’t done). Partnership agreements for investment clubs are considerably dumbed down so I wouldn’t follow any of those.
Thanks for the great feedback guys. Next step…consult a lawyer friend of mine who has worked in HF due diligence. I also have a few “old” copies of HF docs from my prior job that I can consult too. AliMan, I’ll report back any decent information I receive.
value, keep us posted on your results. i"M interested to do the same. I might go with the investment club account. qucik fast, gets the job done. The ppl who i will be partnering up with want no part in the decision making process. so really, that is just a formality thing to me.
any new word on this?
Two scenarios: My lawyer friend is either on vacation or is ignoring me. I am familiar with hedge fund docs from my prior work experience so no new information gathered from that avenue aside from the obvious that Delaware is the most popular locality for registering (domestic vehicles). Depending on the state you are actually residing in, dual-layered fees may apply. I do know another acquaintance who set-up his own investment partnership soley for his assets. It probably would not apply to this situation but may be helpful regardless. TheAliMan may be onto something - namely that an LLC may not be necessary - IF one controls the potential litigation costs through selection. My personal circumstances are that these individuals are my friends and that my assets will dominate the portfolio. I am pretty sure that at most they would contribute 10-20% of the fund. This provides twofold protection in that these people are not likely to sue and that their losses are capped and manageable. Hopefully I’ll hear back from my friend soon.
I would get an agreement and take all the necessary steps. Plenty of “friends” have sued their “friends”. Also, I may be confused, but how are their losses capped because you have contributed most of the money. Unless you plan on taking more than your fair share of the losses then their losses are just that, their losses, whether your money is mixed with their money or not.
another thing might be to look down the road. It may start with your friends, but what if at some point you want to take additional capital, maybe your friend’s friends, etc. If that is an option then the liability may eventually grow depending on how you set it up.
Yeah I have thought about both points tvPM and Maverick. What I meant by the liability is controllable is that if I limit their contributions to a nominal amount (comparatively) then I cannot be wiped out as their capital is only a fraction of my net worth in a worst case scenario. If it expands beyond friends then a clause similar to what TheAliMan mentioned may be appropriate. The right to substitute the GP from an individual to a LLC. If the contributions from friends of friends are sizeable enough then I can set-up an LLC as step-two.