# Investment fund structure



## Ethan (Aug 8, 2010)

I am looking at pooling investor money to start something similar to a hedge fund, that I would manage. The fund will be rather small, somewhere between $250,000 and $500,000. Given the small size of the fund, I will not make significant money, as such I am trying to keep my expenses to a minimum. I plan on structuring this project and writing all legal contracts myself. I have written a 15 page information package, all necessary contracts, and incorporated. The last step before I actually raise money is to ensure my understanding of the tax regulations are correct, given my small size I don't want to pay a lawyer $500/hour to review. I called the CRA business help line and ran my plans by them, they did not know the answer. I was forwarded to a senior agent at the CRA who also did not know the answer. I was told I should ask a tax auditor and was given a fax number. I faxed my questions to them 2 weeks ago and am still waiting for a response. While I wait for the CRA's response, I was wondering if anyone on CMF has any experience in these matters and could provide some insight. Below is what I faxed to the CRA.



> I am looking to pool investor funds to invest in publicly traded securities.
> 
> Investors will purchase units in a joint venture (“JV”). Since joint ventures cannot borrow money or open trading accounts, the funds of the joint venture will be given to a nominee company (“NC”). The NC will open a trading account at an online brokerage, and trade the funds on behalf of the JV. A legal agreement will be signed between the JV and the NC indicating that the funds given from the JV to the NC, and all resulting profits and losses generated by the funds, belong to the JV. The NC will not report any revenues or expenses for tax purposes, from a tax perspective the NC does not possess anything, it merely holds the funds on behalf of the JV. Since a JV is not a taxable entity, all gains and losses incurred will be attributed annually to the JV unit holders based on the number of units they own in the joint venture.
> 
> ...


Any insight would be much appreciated.

-Ethan


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## TheMoneyGuide (Nov 19, 2012)

The compliance and regulations associated with raising funds, especially when related to securities can be tricky. Might be worth dropping a few thousands down for some professional advice.

Which broker are you using? IB family and friends advisor account?

John


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## Ethan (Aug 8, 2010)

TheMoneyGuide said:


> The compliance and regulations associated with raising funds, especially when related to securities can be tricky. Might be worth dropping a few thousands down for some professional advice.
> 
> Which broker are you using? IB family and friends advisor account?
> 
> John


Through my work and my personal investments, I've been involved in several joint ventures. I have templates from the lawyers for writing offering memorandums. I'm also getting all investors to sign "Form 45-107F5 - Saskatchewan Risk Acknowledgement Form." This form indicates that the investors are investing in exempt market securities, meaning I don't have to provide a prospectus and do not have to sell through an investment dealer registered with a securities regulatory authority. It further acknowledges the investor is either accredited, or is a close personal friend of mine, knowing me well enough to judge my competency. I think I'm mostly covered on the legal perspective, I'm mostly worried about the taxes.

I will be using a corporate margin account through Scotia iTrade. The account would be in the name of my nominee company, with all gains/losses going to the JV (the nominee company would report $0 in revenue and $0 in expenses as everything would be attributed to the JV). This is how the real estate joint ventures I've been a part of work. My concern is that iTrade issues T-slips for the dividends received during the year. At tax time, is the CRA going to say "iTrade says your nominee company received $50,000 in dividends, you owe us corporate taxes on that amount. We also think you had capital gains during the year" or are they going to be comfortable with me attributing those dividends to the JV?


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## Four Pillars (Apr 5, 2009)

For the liability issues alone, I would hire a lawyer. If they are too expensive for you then don't start this business. 

Handling investor money is a whole different ball of wax compared to most businesses - you have to make sure you know what you are doing from a business point of view.


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## MoneyGal (Apr 24, 2009)

I would seek an advance ruling from CRA, and/or search existing advanced rulings, and/or work with a lawyer who has relevant experience. 

I'd start with the advanced ruling in your case, though, because 1. you sound like you want to DIY (on many levels) and 2. you actually want tax questions answered, and CRA is the place to get that.


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## Ethan (Aug 8, 2010)

MoneyGal said:


> I would seek an advance ruling from CRA, and/or search existing advanced rulings, and/or work with a lawyer who has relevant experience.
> 
> I'd start with the advanced ruling in your case, though, because 1. you sound like you want to DIY (on many levels) and 2. you actually want tax questions answered, and CRA is the place to get that.


Thanks, I didn't know about that service. I wonder why the CRA didn't point me in that direction when the agents at the business help line didn't know the answer. I'd much prefer to deal directly with the CRA on this than pay a lawyer or a CA firm. When dealing with lawyers or a CA firm there is always the risk that the CRA disagrees with them.


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## MoneyGal (Apr 24, 2009)

Good question! I'm glad I posted, I actually think this is the right service for you.


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## MoreMiles (Apr 20, 2011)

I admire your ambition. 
Most people would probably not want to invest in a fund that has no manager credential, legal contract review, prospectus explanation, custodian guarantee, etc.

What is there to prevent you making up books and run a ponzi? To prove that, you need CA auditor and lawyer representative....

Sorry to tell you, you need to spend money to make money.


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## Cal (Jun 17, 2009)

I was thinking of the time and effort, as well as the expense. It seems like you are thinking of having MER's as minimal as possible, and are planning on having the investors pay their share of the expenses......so for you to charge even .25% for your management fee of $500,000 is only about $1250 for your fee. I know that the investors pay it, just as mutual fund investors pay their MER's, but is that worth your time and effort for the legal ramifications of running this? Not sure.


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## MoreMiles (Apr 20, 2011)

Ethan said:


> It further acknowledges the investor is either accredited, or is a close personal friend of mine, knowing me well enough to judge my competency. I think I'm mostly covered on the legal perspective, I'm mostly worried about the taxes.


Assuming you do have the competency of legal preparations, you would still need a lawyer because of their work is covered by professional liability insurance... yours is not. If there is an error, you have some recourse against your lawyer for screwing up, which hopefully is covered by their professional liability insurance... whereas your own legal work would not.



Ethan said:


> I will be using a corporate margin account through Scotia iTrade. The account would be in the name of my nominee company, with all gains/losses going to the JV (the nominee company would report $0 in revenue and $0 in expenses as everything would be attributed to the JV).


Then you will need to set up a corporation, file corporate taxes, the corporate revenue cannot "simply be your money"... you have to be a director, drawing a salary by issuing yourself a T4, etc. 



Ethan said:


> My concern is that iTrade issues T-slips for the dividends received during the year. At tax time, is the CRA going to say "iTrade says your nominee company received $50,000 in dividends, you owe us corporate taxes on that amount. We also think you had capital gains during the year" or are they going to be comfortable with me attributing those dividends to the JV?


I think that is your least concern. It looks like the invested money will become the property of this corporation. Will your investors be listed as partners or shareholders for this corporation? If not, why not? Who will be listed as the owner? You? So you want people to give you money, transfer the ownership of that money to your corporation, which does not even have a proper contract / prospectus written by a lawyer? The ownership of that fund is not deeded or segregated? I am really confused... the investors will only have your word as guarantee that their money is still there and belongs to them?

Have you thought about different scenarios? Your fund will be a close-end fund, right? What if people want to redeem? Where is your cash reserve for redemption? Or is there a restriction on redemption? Who will answer your investor call or transaction request? Will your corporation rent an office and hire a secretary to do that? How about fax and phone lines so they can send you those requests? You may end up spending $50,000 on salary and office overhead...

You then either have to charge like a MER of 5% to cover it if the fund is small, or you have to raise the fund size... to something like $100 million to make it worthwhile... somehow, I don't think it's that easy just to open shop and get $100 million to a private corporation, just like that... or maybe it is.

I am interested in hearing your progress. If it does work out for you in a few months / years, please keep us updated.


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## Ethan (Aug 8, 2010)

MoreMiles said:


> I admire your ambition.
> Most people would probably not want to invest in a fund that has no manager credential, legal contract review, prospectus explanation, custodian guarantee, etc.
> 
> What is there to prevent you making up books and run a ponzi? To prove that, you need CA auditor and lawyer representative....
> ...


I have a finance degree, the CA designation and passed the Canadian Securities Course. I spent 2 coop terms on a bond trading desk before articling at a big 4 accounting firm and working as a financial analyst for a publicly traded mining company.

I'm not expecting this to be $10 million fund, and I'm not quitting my day job to run this (my boss is fine with my starting this up). I am only inviting people into this JV that I know personally, and I am not allowing them to invest more money than the $50,000 my fiancee and I are investing. My potential investors consists of family, friends, and people that have known me since I was a kid and have expressed interest in investing with me. Some have offered me jobs in the past while others pay me by the hour to research particular companies for them. I am optimistically expecting to raise $500,000. With that amount of money they cannot expect me to hire lawyers or auditors as the costs would be prohibitive. I will be e-mailing my investors brokerage statements as well as a discussion of the JV's activities quarterly. I will run the JV from a home office and won't have any employees, I will be available to all investors by phone or e-mail.


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## Ethan (Aug 8, 2010)

Cal said:


> I was thinking of the time and effort, as well as the expense. It seems like you are thinking of having MER's as minimal as possible, and are planning on having the investors pay their share of the expenses......so for you to charge even .25% for your management fee of $500,000 is only about $1250 for your fee. I know that the investors pay it, just as mutual fund investors pay their MER's, but is that worth your time and effort for the legal ramifications of running this? Not sure.


I'm not expecting lawsuits even in an absolute worst case scenario. Investors will be signing risk acknowledgement forms (obtained from the Saskatchewan Securities Commission.) My fees will not be based on assets, I will be charging 20% of net profits (ie after trading commissions) in excess of a benchmark.

I am not starting the JV with the expectation of making large sums of money. Running this JV gives me the opportunity to manage a larger amount than is in my personal portfolio and to establish a track record. If the fund does well I will be able to raise much larger amounts in the future, at which point I will blindly raise money, I will have legal representation and I will likely pay for an audit.

For now, think of this as 10-15 investors pooling together $500,000 to be managed by some kid that they already go to for investment advice. I'm looking for the easiest, tax-efficient way to structure that.

This is no different than the early Buffett partnerships. He would raise ~$100,000 from 4-5 friends or family members to form a partnership that invested in stocks. He ran the funds from home with no staff, did not require an audit, and charged fees of 25% of profits in excess of 6%. I am not saying I'm the next Warren Buffett, I'm saying I'm taking the same steps he took at my age.


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## GoldStone (Mar 6, 2011)

Will you work for free in the down years?


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## Ethan (Aug 8, 2010)

MoreMiles said:


> Assuming you do have the competency of legal preparations, you would still need a lawyer because of their work is covered by professional liability insurance... yours is not. If there is an error, you have some recourse against your lawyer for screwing up, which hopefully is covered by their professional liability insurance... whereas your own legal work would not.


Because I know my investors, and they're signing risk acknowledgement forms provided by the Saskatchewan Securities Commission, I'm not concerned about legal liabilities.



> Then you will need to set up a corporation, file corporate taxes, the corporate revenue cannot "simply be your money"... you have to be a director, drawing a salary by issuing yourself a T4, etc.


I have a corporation set up for this purpose, I am the sole director of this corporation. The corporation has no employees, it will merely hold the assets for the JV and pay me as a contractor. No T4 will be required, personally I will claim any payments as business income.



> I think that is your least concern. It looks like the invested money will become the property of this corporation. Will your investors be listed as partners or shareholders for this corporation? If not, why not? Who will be listed as the owner? You? So you want people to give you money, transfer the ownership of that money to your corporation, which does not even have a proper contract / prospectus written by a lawyer? The ownership of that fund is not deeded or segregated? I am really confused... the investors will only have your word as guarantee that their money is still there and belongs to them?


The investors will have copies of legal agreements signed between the JV and the nominee company indicated that the JV is the beneficial owner of the assets held by the nominee company. I've been involved with real estate investments with many of my potential investors that are set up in this way. It is a common way to set up real estate investments held by various parties, I have never seen it done for stock market investments which is the reason I am seeking clarity on the taxation. Search for "nominee" in the following document which further explains why nominee companies are used and how they work.

http://www.dwpv.com/images/Doing_Business_in_Canada_6th_ed_English_ewlr.pdf



> Have you thought about different scenarios? Your fund will be a close-end fund, right? What if people want to redeem? Where is your cash reserve for redemption? Or is there a restriction on redemption? Who will answer your investor call or transaction request? Will your corporation rent an office and hire a secretary to do that? How about fax and phone lines so they can send you those requests? You may end up spending $50,000 on salary and office overhead...


This is only intended to be a $500,000 fund. Although I will be inviting ~50 people into this, I only expect to have 10-15 investors. I will have no employees and will run the JV from my home office, there will be no incremental costs from my current lifestyle. I will be available to answer any investor questions, however they will receive brokerage statements and my commentary quarterly. The fund will be close-ended. Investor money will be tied up for 30 months, at which point they will have the option to redeem their funds.



> You then either have to charge like a MER of 5% to cover it if the fund is small, or you have to raise the fund size... to something like $100 million to make it worthwhile... somehow, I don't think it's that easy just to open shop and get $100 million to a private corporation, just like that... or maybe it is.
> 
> I am interested in hearing your progress. If it does work out for you in a few months / years, please keep us updated.


I'm not quitting my day job so I don't need the JV to make enough money to sustain my lifestyle. This is my first foray into raising money and is meant to establish a track record investing other peoples money. I'm not charging an MER based on assets, I'm charging 20% of net profits in excess of a benchmark.

I will keep everyone updated on the progress, I've been working on this since February. I was initially hoping on launching the JV on July 1, but with the uncertainty regarding the tax situation the start date is going to be pushed back until I have clarity on my structure. Thanks for all your comments.


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## Ethan (Aug 8, 2010)

GoldStone said:


> Will you work for free in the down years?


Yes. I'm putting $50,000 into this personally and already spend several hours/month reading financial statements. The only differences between managing own investments and running this fund are:

1. I'll be managing more money
2. I'll be writing quarterly commentary on my results

There will be very little incremental time spent running this so I don't necessarily consider it working for free. I'm more worried about losing investor money than I am worried about working for free.


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## MoreMiles (Apr 20, 2011)

Ethan said:


> I have a finance degree, the CA designation and passed the Canadian Securities Course. I spent 2 coop terms on a bond trading desk before articling at a big 4 accounting firm and working as a financial analyst for a publicly traded mining company.


So you are a Chartered Accountant, but you are asking the public forum to provide you with tax interpretations. And you have never heard of Advanced Ruling with CRA, despite your experience with a "big accounting" firm? With all due respect, it is possible that you have over-estimated your financial ability? Also, are you saying that you will beat the market index and make profit from fund performance only? Is it possible that you miscalculated your ability to score better than the professional fund managers?

My concerns / feedbacks...

1. You worked hard to earn that professional degree. Do you really wish to jeopardize it if something goes wrong with your financial venture? You may be found criminally responsible for breaking investment laws... That may affect your ability to maintain the CA license. Unlike a general employee, a professional's best asset is his/her license. What is a lawyer or dentist without the license? What is a chartered accountant without the license? You get my point? Protect your biggest asset at all costs! That is your license to become a millionaire when you retire. You may get lucky with your venture, but you will surely get there if you work hard with a CA degree.

2. You focused a lot of "friends and families" going easy on you, mitigating legal risks. You know that the number one cause of ruining friendship and family union... money. Even couples often get divorce because there is a money dispute and start to sue each other. So I think it is too naive to assume the risk is not there, simply because it is with friends and families. Those are only allies until they turn into adversarials.


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## Ethan (Aug 8, 2010)

MoreMiles said:


> So you are a Chartered Accountant, but you are asking the public forum to provide you with tax interpretations. And you have never heard of Advanced Ruling with CRA, despite your experience with a "big accounting" firm? With all due respect, it is possible that you have over-estimated your financial ability?


I worked in audit, not tax. I spent ~150 hours in the tax department to get my tax hours for my designation, and I was tested on corporate and personal income taxes throughout CASB and the UFE. Neither dealt with structuring investment funds or advance tax rulings. I called the CRA and spoke to a senior agent who had never heard about nominee companies. What I'm dealing with is not common. I have researched the tax act and my old tax textbooks to find a structure that I think will work. I have not claimed to be a tax expert, I'm merely looking for confirmation.



> Also, are you saying that you will beat the market index and make profit from fund performance only? Is it possible that you miscalculated your ability to score better than the professional fund managers?


I intend to beat the market index but I am in no way guaranteeing that. Both my information package and my contract clearly state that returns are not guaranteed and that investors could lose their entire investment in a worse case scenario.



> My concerns / feedbacks...
> 
> 1. You worked hard to earn that professional degree. Do you really wish to jeopardize it if something goes wrong with your financial venture? You may be found criminally responsible for breaking investment laws... That may affect your ability to maintain the CA license. Unlike a general employee, a professional's best asset is his/her license. What is a lawyer or dentist without the license? What is a chartered accountant without the license? You get my point? Protect your biggest asset at all costs! That is your license to become a millionaire when you retire. You may get lucky with your venture, but you will surely get there if you work hard with a CA degree.
> 
> 2. You focused a lot of "friends and families" going easy on you, mitigating legal risks. You know that the number one cause of ruining friendship and family union... money. Even couples often get divorce because there is a money dispute and start to sue each other. So I think it is too naive to assume the risk is not there, simply because it is with friends and families. Those are only allies until they turn into adversarials.


I appreciate your concern but think you are way overstating the risks. My investors are signing a form prepared by the Saskatchewan Securities Commission that states they are acknowledging the risk involved and that they could lose their entire investment. As long as I make no misrepresentations, there is no way that I could lose my designation or be sued. Again, I expect the fund to do well, but my bases are covered in a worst-case scenario.


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## Four Pillars (Apr 5, 2009)

I second MM's concern about involving friends and family - what if the fund doesn't do well? 

I think you are underestimating the amount of time you will need for the quarterly statements. Are they going to include performance numbers? Are you going to be tallying up the fund value every business day? Once a week/month?

Will the investors be putting in the same amounts of money or will there be varying amounts? How will you keep track of the ownership of the money? Ie you put in $50k, I put in $100k - at the end of the 30 months the fund goes up say 15% - I want to withdraw $20k to buy a car. How many 'units' do I own relative to you?


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## Ethan (Aug 8, 2010)

If the fund doesn't do well the investors will lose money and I won't get paid, my investors know that going in.

The quarterly statements won't take more than 1-2 hours. Since I have no disclosure requirements through this structure, my investors will be receiving special purpose financial statements consisting of a balance sheet and a statement of comprehensive income, laid out in such a manner that it shows how the tax balances will be shown. This is what they will see:

*Balance Sheet*

*Assets* - Cash, Securities (at FMV based on the brokerage statements)
*Liabilities* - Short put options (at FMV based on the brokerage statements), Short call options (at FMV based on the brokerage statements)
*Equity* - unitholder equity (this is equal to unitholder contributions plus any gains and will agree to the total on the brokerage statements which will be included in the package)

*Statement of comprehensive income*

*Revenue*
+Capital gains
+Dividends

*Expenses*
-Commissions
-Interest
-Management fees

*Net income*

+/-Unrealized gains/(losses)

*Comprehensive Income*

At year end (December 31), the investors will input the following totals into their personal tax returns:

Capital Gains
Dividends
Expenses

Investors are taxed on the capital gains and dividends less expenses within the fund. Therefore, any distributions from the fund are paid out of either after tax earnings or are a refund of initial contributions (ie no further taxes).

Performance will be measured quarterly, this is simple using the XIRR function in excel.

Investors will purchase $5,000 units. If an investor puts in $25,000, and I raise $500,000 in total, then the investor would own 5 out of 100 units (5% ownership). At tax time, not only will I show the total capital gains/dividends/expenses, but I will show how much each investor has of each balance based on the units they own. After 30 months, investors will be able to withdraw funds by redeeming their units. Lets say the first redemption is December 31, 2015. Investors will need to let me know how many units they will be redeeming by December 1, 2015 (and they will only be able to redeem full units). I will fair value the units as of December 31, 2015, and have their funds to them by January 1, 2016. It's not the most liquid fund, but they will be fully aware of this going in.


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## Eclectic12 (Oct 20, 2010)

Ethan said:


> If the fund doesn't do well the investors will lose money and I won't get paid, my investors know that going in ...


Maybe you know your investors well enough to be sure of how they will react.

Bear in mind that I can recall lots of people bitterly complaining prior to the tech crash around 2000 about their advisor being too conservative and only making 14 to 17%. They moved their money to a more aggressive advisor just in time to get more than a hair cut. Yet few acknowledged that their decision was the cause.


Money and/or the perception that they can do better can cause some strange actions.


Which ever way you go ... I'm hoping all goes well.


Cheers


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## Charlie (May 20, 2011)

Ethan....sounds like, in general, you're doing a basic investment club....which is usually reported as a partnership. You issue forms at year end (T5013 and file a partnership return). That accomplishes all you're proposing. The income/loss flows through to the partners on a reasonable basis. You'll need a partnership agreement, and have to address what happens when investors come in and out. They're not that uncommon.

That part's easy.

If your reach for investors extends beyond friends and family, I'd be a bit concerned about the regulatory stuff. All sorts of pitfalls if you're somehow deemed to be an unregistered broker or dealer. The issuing of 'units' may taint your plan if you're deemed to be selling these units rather then just a pooling of funds. The tax bit's easy. I think your structure and making sure you're not offside with the regulatory stuff may warrant some time.

But a basic investment club is simply reported as a partnership -- and doesn't preclude you from taking your fee (agreed to by the partners) as part of your allocation.


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## james4beach (Nov 15, 2012)

This is just an idea, but what the OP may consider: instead of managing the account with other people's money, position yourself more like a service that provides trade instructions (I would call them "ideas"). Or who knows maybe I'm just describing your existing job.

You would be doing your trading totally in your own account, but give precise details about each position you take. Others can mirror what you are doing and pay you a fee, if they want your instructions. If you're coming up with great trades then they will enjoy the same gains you are. And think of the benefits... no money to manage. No risk of a run to withdraw from your fund. No complicated tax reporting.

I realize this doesn't have the same benefits as an investment pool. But just an idea because with these discount brokerages, you can get such cheap trades that pooling assets may not really be necessary. Even things like odd lot orders are so normal these days with ECNs, not like the old days where everything had to be in 100s of units so it's all really become more accessible. The only hard part is figuring out what trades to make, and that's a service where you can add value.

So many dangers in managing other peoples money. I hope you know all these people really well, because if any of them turns out to be a gangster or mafia guy, your life may be on the line.


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## Ethan (Aug 8, 2010)

After doing a lot of thought, I have decided to abandon the joint venture model, and structure this as a partnership, as suggested by Charlie. My reason for doing this is simplicity. I still have not heard back from the CRA regarding whether the JV structure will work. I could either pay the CRA $100/hour to issue me an opinion on whether this works, hire a lawyer at $300/hour, or hire a CA firm at $300/hour to give me an opinion. There is still the risk that the CRA disagrees with any of these opinions. A partnership model makes more sense for me because my broker, Scotia iTrade, is already setup to accommodate partnerships. They behave similar to a JV, I attribute the capital gains/losses, dividends and expenses to the partners each year through the T5013.

I've spent some time over the last week re-writing my offering memorandum to describe the legal and tax consequences of investing in a partnership. I think I'm ready to go. I'll be sending out the document within the next week, with commitments required by July 1, 2013. Once I know who my investors are and what amounts they are contributing, I will need to register the partnership, open a chequing account and a brokerage account. Investors will be required to submit a cheque of $1 on July 1, 2013 (for iTrade anti-money-laundering purposes). The balance will be required by August 23, 2013 with trading starting on September 1, 2013.

Thanks for your input and wish me luck!


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## Ethan (Aug 8, 2010)

After a few regulatory hiccups in June, I finally sent out my information package on July 23, 2013. I spent a fair amount of time reading through regulations on the Financial and Consumer Affairs Authority of Saskatchewan website and had a phone conversation with their deputy director to make sure I was onside. My investors are investing under the exemptions available under section 2.4 of National Instrument 45-106.

I also setup a trust account at a law office to hold my investor's funds while the limited partnership gets registered both with the province and at the broker.

So far I have 7 investors committed to a total of $250,000, I still have a few more people to follow up with and would like to get over $300,000 before the fund raising period ends next week.

This has been really fun, I'm so close to managing this portfolio. I know there are other young investors on this site who have expressed an interest in doing something similar, feel free to contact me with questions or to share your experiences.


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## alingva (Aug 17, 2013)

I am wondering, how much money are you planning to make from this? Is it an experiment or you want to make money from it? If you charge your clients even 10% (unreasonable) it will be 50K/y. Will you be able to pay lawyers, accountants, secretary, rent etc from this? You will not even have money to pay for the internet to post on this forum anymore!


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## james4beach (Nov 15, 2012)

Best of luck and I hope it works out well. Please don't use margin.


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## MoreMiles (Apr 20, 2011)

james4beach said:


> Best of luck and I hope it works out well. Please don't use margin.


The OP wants to do a "hedge fund" as stated on his first post... which means to me, long and short positions... that means margin. :hopelessness:

Good luck... will you have a website for people to keep track of NAV?


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## Fain (Oct 11, 2009)

Good luck, alot of HedgeFunds outsource their back-office compliance work and there's a few companies offering this service. Hopefully the amount of start-up capital will increase and you can have a go at this in a serious way. This could start as a side project but end up being your career. 

Was it easy getting the Analyst job without having a CFA?


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## Ethan (Aug 8, 2010)

Allingva - this is more of an experiment than a money making venture. If I make $10,000/year from this I'll be overjoyed. The purpose is to establish a track record of good returns managing other people's money so that I can launch a larger fund in the future.

James4Beach and More Miles - I will be selling uncovered put options, which is a liability. I will strive to keep the cash position near $0. The fund will be fully invested and I won't intentionally pay margin interest, but I will have to temporarily borrow on margin if the short put positions get called.

Fain - I am using lawyers (unfortunately) to help me get the LP registered, but I plan on doing everything myself after that. The investors will get the brokerage statements, as well as a balance sheet, income statement and management commentary quarterly. I'm running the fund from my home office (and not quitting my day job) so the costs should be minimal.

The financial analyst job dealt with departmental variance analysis, financial statement preparation and getting those statement through an audit. They were looking for a CA for the role, not a CFA.


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## atrp2biz (Sep 22, 2010)

How do you intend on maintaining sufficient margin on the uncovered puts with zero cash? Having zero cash would suggest a fair bit of leverage in your portfolio.

A retail investor would maximize returns by using a combination of uncovered puts and covered calls while maintaining a cash balance of zero. This is the case since a retail investor cannot borrow at a rate below nor can it earn interest income at a rate above the implied risk free rate as determined by put-call parity. At the money calls of non-dividend paying underlyings would have a higher premium than their put counterparts, therefore using cash to buy the underlying and selling the calls would maximize value (as opposed to only selling naked puts).


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## Ethan (Aug 8, 2010)

My information package covers my investment strategy in 3 pages and has a 6 page example of trades based on market prices from the Friday before I released the information package. Without going into too much detail, the fund will be investing in companies with dividend yields in excess of projected inflation, and that historically produces greater free cash flows than the dividend requirements. I will sell covered calls and uncovered puts against these stocks, the proceeds from which will be used to buy more stocks against which more calls and puts will be sold. Uncovered puts will be but a small part of the portfolio and are the only way in which I would need to access margin.

In a worst case scenario all stocks go down and my puts get called. The fund will meet its margin requirements by selling shares when the call options expire, or by buying back calls then selling the shares if all stocks are covered by calls when a margin call occurs. The put options on average will have a later maturity than the calls so I consider this scenario unlikely.


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## atrp2biz (Sep 22, 2010)

So what is the difference between your fund and a covered call ETF? Where is the value add?


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## humble_pie (Jun 7, 2009)

ethan - you have been trading options, how long? you were seriously asking to sell a 2016 canadian option like, many long months ago?

i'm perfectly happy if you want to do stocks using other peoples' money. Perfectly. Delightedly. Happy. Wishing the very best.

but i don't like seeing any options novice taking money from other people. I am, in fact, dead against anybody "managing" other peoples' money in options trading, period. I am 100% in favour of people either learning how to do options themselves or else forgetting all about it.


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## humble_pie (Jun 7, 2009)

ps puts don't get called, they get assigned to the short or exercised by the long ...


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## humble_pie (Jun 7, 2009)

Ethan said:


> ... In a worst case scenario all stocks go down and my puts get called. The fund will meet its margin requirements by selling shares when the call options expire, *or by buying back calls then selling the shares if all stocks are covered by calls when a margin call occurs*.



this is madness

in late 2008 or early 2009 a strategy like this would burn a fund into bankruptcy within days

ethan have you ever, actually, dealt with a margin call?


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## OnlyMyOpinion (Sep 1, 2013)

Well we have to say, you guys lost us. 
I guess that means we are "unsophisticated' investors. 
It also means you would never find our hard-earned money in something like this that we don't understand.


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## Ethan (Aug 8, 2010)

atrp2biz said:


> So what is the difference between your fund and a covered call ETF? Where is the value add?


One value add is I sell uncovered put options in addition to covered calls. A second value add is the compensation, most ETF's charge a fee on assets under management whereas I only charge fees if I'm profitable.

I approached my investors and explained the strategy to them, many of them were either unfamiliar with the concept, or in the case of 1 investor he was familiar with the concept but unsure how to start doing it. I sold them on the concept, and therefore they are investing with me. They're free to invest in covered call ETF's.


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## Ethan (Aug 8, 2010)

humble_pie said:


> ethan - you have been trading options, how long? you were seriously asking to sell a 2016 canadian option like, many long months ago?


I first traded options with my own money in July of 2011. I had been following them for years before that. I don't employ complex strategies, mainly I sell covered calls and uncovered puts, I seldom buy calls and never buy puts.

My question about 2016 options was when they would first be offered. I thought they were 30 month options but wanted to see if someone here knew the answer. I like selling long-dated puts, January 2015 was the longest dated options offered at the time and I wanted to know when the Jan 2016's became available.



> i'm perfectly happy if you want to do stocks using other peoples' money. Perfectly. Delightedly. Happy. Wishing the very best.
> 
> but i don't like seeing any options novice taking money from other people. I am, in fact, dead against anybody "managing" other peoples' money in options trading, period. I am 100% in favour of people either learning how to do options themselves or else forgetting all about it.


What's wrong with trading options with other people's money? In my case, my investors are well aware of the risks as I have outlined them very clearly in my information package.


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## Ethan (Aug 8, 2010)

humble_pie said:


> ps puts don't get called, they get assigned to the short or exercised by the long ...


Slip of the tongue. A call option can result in the buyer of the option "calling" the shares from the seller, and a put option can result in the option buyer "putting" the shares to the seller.


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## Ethan (Aug 8, 2010)

humble_pie said:


> this is madness
> 
> in late 2008 or early 2009 a strategy like this would burn a fund into bankruptcy within days
> 
> ethan have you ever, actually, dealt with a margin call?


I'm well aware of the risks.

I've had 1 margin call. I withdrew $5,000 of profits from my margin account to pay down my mortgage, leaving my margin account without less buying power than I usually maintain. The markets dropped the next week so I had to either deposit cash, sell assets or buy back a liability. I chose to buy back a put option (at a profit). The markets rebounded the following week, my buying power went up and I haven't had a margin call since.


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## humble_pie (Jun 7, 2009)

Ethan said:


> I'm well aware of the risks


alas the paragraph below shows that you have not got any awareness of the risks.




> In a worst case scenario all stocks go down and my puts get called. The fund will meet its margin requirements by selling shares when the call options expire, or by *buying back calls then selling the shares if all stocks are covered by calls when a margin call occurs*.


in a worst case scenario, when all stocks plunge & all puts get assigned to you, the broker is not going to wait demurely while your calls tippytoe towards expiration date. The broker demanding to cure a margin debt needs to receive his new $$ that same day or the following day at the latest; otherwise he will sell your assets.

this brings us to the fairy-tale fantasy set forth in the 2nd subordinate clause of the above sentence in bold. *"The fund will meet its margin requirements ... by buying back calls then selling the shares."*

here is where the novice lack of options experience screams so loudly. In a worst case scenario, the value of all your stocks will have plummeted, including all the long underlyings with short calls written against them.

any global collapse that is severe enough to trigger all your short puts will drop your portfolio by 35-50%. This is what happened in 2008/09. Only 5 years ago. Perhaps you don't remember, since you appear to have begun investing just a couple of years back?

in this chaotic environment, you will be forced to liquidate sound stock at the very worst moment.

the story gets worse. Since yours is a zero cash portfolio, you will not have any $$ to buy back the calls, therefore you will be forced to place contingent orders for reverse buy-writes. Again, it's obvious you were not investing during the 2008/09 crash; if you had been, you would know that nothing works normally in brokerage houses during major crashes & it is often impossible to contact brokers under such frantic conditions.

websites go down, networks & phone systems fail, brokers don't answer calls even when they hear the ring signal. Even if you managed to reach live personnel & place an order, the broker would not likely have house staff or jitneys available to work a contingent order. 

in other words, just getting your calls bought back - so that you can then proceed to sell the plummeting shares - so that you can then proceed to repair the margin problem - could easily take one or 2 days of constant nerve-wracking effort.

the story gets even worse. The final dollars you will obtain from this forced selling of shares will be handicapped by the relatively high price you will have to pay to first buy back the calls. Gamma/theta will buoy the future prices of the calls even as the spot price of the shares plummets without hindrance.

and worse yet. Let's not think about the uproar that your clients will be stoking higher & higher, round the clock. It doesn't matter how many times they've signed documents stating that they can only redeem at certain specific times; in a market meltdown they are *going* to want their money back. They are *going* to demand to know what's happening. Some will probably drive over to your residence, ring the doorbell, bang on the door, who knows what else.

i find it a shocking scandal that the securities authorities of any province will allow an individual with no options experience other than a handful of personal trades & almost nothing other than bookish options knowledge, to solicit monies from the public & to charge fees for attempting to "manage" an options portfolio. 

perhaps this is a saskatchewan thing? one hears that some parties are trying to launch crowd-funded IPOs in saskatchewan while the sask authorities struggle to stop this. Just one more symptom that we need a strong national securities commission in canada.

in a way, Ethan, you are doing cmf forum a service. I am certainly in favour of your pilot investment fund project as long as it is limited to straight stocks. I think there is a good chance you will do better than the big TSX index etfs & i sincerely wish you huge success.

but when you attempt to talk about options, IMHO you are floundering over your head. The service you are providing here is demonstrating that, if the general public is indeed ready to hand over its precious $$ to an inexperienced amateur offering so-called options portfolio "management," then we are definitely seeing a strong signal of market froth.


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## Fain (Oct 11, 2009)

Have quarterely redemptions in your fund to minimize the administrative work that you have to do. You could even apply a DSC charge to encourage long-term investing and limit a mass exit from your fund from your investors. I've worked with alot of funds before I became a Trader and this is done by alot of funds. 

What kind of MER do you hope to charge?


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## Ethan (Aug 8, 2010)

Fain said:


> Have quarterely redemptions in your fund to minimize the administrative work that you have to do. You could even apply a DSC charge to encourage long-term investing and limit a mass exit from your fund from your investors. I've worked with alot of funds before I became a Trader and this is done by alot of funds.
> 
> What kind of MER do you hope to charge?


To keep things simple, there are no redemptions allowed prior to December 31, 2018, at which point the fund will be liquidated. I am also not accepting new money into the fund at any time. This is all written into the limited partnership agreement signed by all investors.

My fees are 20% of profits in excess of inflation, in other words 20% of my investors real returns.


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## Ethan (Aug 8, 2010)

> alas the paragraph below shows that you have not got any awareness of the risks.
> 
> in a worst case scenario, when all stocks plunge & all puts get assigned to you, the broker is not going to wait demurely while your calls tippytoe towards expiration date. The broker demanding to cure a margin debt needs to receive his new $$ that same day or the following day at the latest; otherwise he will sell your assets.


How am I not aware of the risks? In the unlikely event of a large margin call I plan on buying back put options and/or buying back calls then selling assets. The broker usually gives you a few days to do this. If I don't sell enough assets or buy back enough puts to meet the brokers margin requirements, the broker sells my assets for me.

My investors have all signed risk acknowledgement forms stating they are aware they could lose their entire investment. Since this is a limited partnership, their maximum loss is equal to their contribution. Not only are my investors aware of this, they have signed documents acknowledging this risk.



humble_pie said:


> any global collapse that is severe enough to trigger all your short puts will drop your portfolio by 35-50%. This is what happened in 2008/09. Only 5 years ago. Perhaps you don't remember, since you appear to have begun investing just a couple of years back?


I bought my first shares in 1999. Since I was 14 years of age at the time I had my Dad set up an account in his name held in trust for me; the account was transferred to my name when I turned 18. My first buy was $1,000 worth of shares in Westjet at IPO if you care to know.

I wasn't trading personally in 2008 because I was working on the trading desk of a pension fund manager. The compliance department had rules in place making it difficult to trade stocks personally so I didn't bother. There were some tense moments when I worked there, particularly around the time of the Bear Sterns fire sale to JP Morgan.



> in this chaotic environment, you will be forced to liquidate sound stock at the very worst moment.
> 
> the story gets worse. Since yours is a zero cash portfolio, you will not have any $$ to buy back the calls


It's a margin account, the broker will lend the partnership money to buy the shares. In a margin account, the cash balance isn't as important as the buying power the broker is willing to extend. In the event of a short put option being exercised the fund will receive shares, which will have some value. If the purchase of these shares results in the fund being overdrawn those shares could be sold; the fund would be out the difference between the strike price and the market price of the shares. The fund can go cash negative, as long as the buying power remains positive.



> i find it a shocking scandal that the securities authorities of any province will allow an individual with no options experience other than a handful of personal trades & almost nothing other than bookish options knowledge, to solicit monies from the public & to charge fees for attempting to "manage" an options portfolio.
> 
> perhaps this is a saskatchewan thing? one hears that some parties are trying to launch crowd-funded IPOs in saskatchewan while the sask authorities struggle to stop this. Just one more symptom that we need a strong national securities commission in canada.


Given how Canadian securities are regulated provincially, this is a Saskatchewan thing. I'm not crowd-funding, I'm raising funds through the exemptions available under section 2.4 of National Instrument 45-106 as allowed by the Saskatchewan Securities Act. Please let me know if you think I am not meeting the requirements of this exemption in any way.



> but when you attempt to talk about options, IMHO you are floundering over your head. The service you are providing here is demonstrating that, if the general public is indeed ready to hand over its precious $$ to an inexperienced amateur offering so-called options portfolio "management," then we are definitely seeing a strong signal of market froth.


I don't know why you continue to try to belittle me, and I'm confused by your message. On September 8, in talking about my portfolio where I have been trading in options for 2 years, you said:

"He achieved success through hard work, in-depth research & very obvious strong talent."

http://canadianmoneyforum.com/showthread.php/16173-single-stock-allocation-percentage/page6

3 weeks later you're referring to me as an inexperienced amateur floundering over my head, whose success is an indication of market froth.

I have relevant work experience, relevant education and relevant personal trading experience. Most importantly, I have not made any misrepresentations to my investors, they are well aware of my education, work experience and personal trading experience as this is all outlined in my information package (which I have not provided to anyone on CMF).


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## humble_pie (Jun 7, 2009)

i'm very happy to support your new endeavour as a 100% straight stock fund. I've already staunchly supported & praised your analytical & portfolio management skills with stocks in another recent thread.

but i'll never support a bunch of hazy, wispy, theoretical debutante ideas about what an amateur believes is options trading, when he's trying to brazenly sell these ideas as a "hedge fund."


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## Ethan (Aug 8, 2010)

8.5 months have elapsed since the last post in this thread, I feel like I should provide an update for everyone who took the time to respond in this thread.

After registering the LP with the provincial authorities, it took a little over a month for Scotia iTrade to setup the account and accept the transfer of funds from my lawyers trust account. After legal fees, the amount transferred into the account was $247,545. The first trade in the account occurred on November 12, 2014. Below are the month end balances per the iTrade statements. The balances differ slightly from the LP's financial statements, because the iTrade account does not reflect accruals (management fees payable, dividends receivable etc.) nor does it include the LP's chequing account balance, which is typically around $200.

November 12, 2014 - $247,545
November 30, 2014 - $249,515
December 31, 2014 - $256,362
January 31, 2014 - $242,817
February 28, 2014 - $265,697
March 31, 2014 - $287,545
April 30, 2014 - $304,162
May 31, 2014 - $317,176

I was paid management fees of $1,686 in late January based on my results from November - December. My next management fee payment will be in late July based on January-June results. As of today's balance, the management fee is approximately $12,000. It's nice to have my hard work rewarded financially, however the fees are secondary to my primary goal of getting my name out there as a competent fund manager and to establish a track record that potential investors can use to evaluate. After early positive results, I agreed to also manage RRSP accounts for 2 individuals nearing retirement on the same fee basis. My assets under management are now greater than $1 million, and my total management fees in the first 7 months of operations are $18,000. Not enough money to quit my day job, but certainly a nice bonus on the side.

As far as taxes go, I filed the tax return for the LP in late March. Since I did not want to spend the money on a tax program, nor did I want to pay a firm, I filed a paper return using the forms available on the CRA website. In addition to a ~40 page paper return, T5013 slips were sent to all investors, who bear the tax burden. I haven't received any queries from the CRA yet.


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## Four Pillars (Apr 5, 2009)

Congrats - sounds like things are going great.


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