INVESTMENT MANAGEMENT
INCUBATOR FUNDS

A GreenTraderFunds-conceived incubator fund is the least expensive and most flexible hedge-fund business plan around!

Our network partner, Investment Law Group can form your incubator fund for around $3,000 for a solo incubator fund, and $7,500 for a friends and family incubator fund. Incubator funds cost less than for-profit hedge funds - which cost around $15,000 - because they don't allow compensation to owner/managers.

The solo incubator fund is designed for your own money only, and the documents are simplified accordingly. The friends and family incubator fund has similar documents to a for-profit hedge fund, minus the compensation clauses.

GreenTraderFunds offers incubator fund clients monthly or quarterly accounting, and annual tax preparation and planning at very competitive prices.

The incubator fund is generally structured as an investment fund vehicle like a Delaware Limited Partnership (LP) or Limited Liability Company (LLC). Your management company is generally formed in your home state, if needed to start. Plus, we provide you with various restrictions and a road map on how to proceed, so as not to go beyond the bounds of trading your own money, or friends and family money in the incubator fund. The Investment Law Group's heavy lifting on the fund paper work including private placement memorandum, LLC operating agreement, and subscription materials can wait until friends and family join. Compensation clauses are added when you go to the final phase. We consider important licensing, registrations, and other plans in phase I too.

The benefit of our incubator fund strategy is that you can begin generating an attractive historical performance record now and wait on completing the setup of a hedge fund (Phase II) that can be offered to others when the fund is already a proven success. This takes considerable start-up risk capital off the table. GreenTraderFunds can also handle the accounting and preparation of your annual income tax return filings for a very reasonable cost, less than what full-fledged hedge funds pay, since you don't have complex investor-level accounting requirements.

Incubator funds can be scaled up to hedge funds or scaled down to a good solution for trading your own funds too. We may use FundCount software for accounting on incubator funds, which includes full general ledger, securities, futures and forex, which means your entire set of entity books are in one program. That's a more appropriate accounting solution anyway for bigger traders with entities, versus using TradeLog just for securities trade accounting, which many of our retail trader clients use (per our Traders section). Learn more about incubator funds in our upcoming Webinar series mentioned above. In some cases, we streamline accounting for incubator funds, skipping FundCount and doing accounting on a quarterly basis. Check with our Christie Kam CPA about that.

Incubator (start-up) fund services from GreenTraderFunds:



Consider starting with a consultation to discuss our incubator fund strategies and if this plan is right for you. Some clients have investors ready to pay them for investment advice right away and it's more appropriate to start off with investment management for separately managed accounts and/or going directly into a full-fledged hedge fund. We will cover state, federal and international registration and licensing issues, development and structuring issues, entity and tax planning and more. We can factor trader tax strategies into your consultation as well. After this initial consultation, you can upgrade to our full execution service packages below and only pay the difference in price, applying your consultation price (whether 30 or 60 minutes).

Process. Most incubator fund jobs are done fairly quickly, in a matter of a week or two. With full-fledged hedge funds and/or investment adviser registrations, there is often some delay due to back and forth with regulators and state, SEC or NFA registrations. You don't need any other service providers, as GreenTraderFunds handles all your needs under one roof.

If you have any questions or would like to get started, please email hedgefunds@greencompany.com and/or call us.

Read some of our articles below about our incubator fund strategies.
We invented this concept in early 2000s and have set up hundreds of incubator funds since.

Feb. 10, 2011 blog: Incubator Funds

Many traders dream of having their own hedge-fund business but only a small percentage of them actually take the plunge. Why do would-be fund managers hesitate? Probably the biggest reason is start-up costs, often financed by the adviser/founder. Advisers probably can’t rely on investors to contribute toward fund expenses until after they successfully raise money and get fund operations underway, and that can take some time.

In addition to paying between $12,000 and $20,000 to form a full-fledged hedge fund, the new fund manager must plan on accounting and tax preparation for the first year of operations, running anywhere from $1,000 per month for accounting to $4,000 per year for annual income tax preparation (including investor K-1s). Both the start-up and operating costs may seem quite high, especially for a trader who doesn’t yet have investors lined up to help cover these costs.

The GreenTraderFunds incubator fund strategy and package is a great solution to this important start-up cost issue. Incubator formation costs with our attorneys in phase I are only around $3,000. Also, our CPAs perform accounting with performance record for around $1,000 per quarter, and year-end tax preparation for approximately $2,500. That's a huge savings for the adviser versus starting out with a full-fledged hedge fund.

The main value of this incubator fund strategy is to generate a historical performance record for the fund before spending the lion’s share of the expenditures for accommodating outside investors. You can scale up to a full-fledged hedge fund, or scale down to a personal trading business entity.

It’s difficult to attract outside investors without a good trading performance record, otherwise known as a track record. Institutional investors also want to see a good management and business record of success. They skip start-up managers who have not yet proven themselves as business people, and avoid fledgling managers who may not survive the next down trend.

Although a trader may have lots of experience, it is quite likely that under federal securities and futures laws, he will not be able to use quantitative measures of his success to attract potential investors in his new fund. Showing past and prior performance may be allowable under certain restrictive conditions and with using the appropriate disclaimers and disclosures. Keep in mind that prior performance may be apples and oranges compared to a new fund’s trading program too. It’s important to discuss these matters with attorneys experienced in investment management.

Our GreenTraderFunds incubator fund plan deals with these issues. We discuss prior and past performance and how it may or may not be useable. We help devise a trading program for attracting investors later on that’s both realistic and appropriate for investors. Our CPAs and accountants prepare a historical performance record for the incubator fund to be used later on in the full hedge fund documents.

Starting your hedge fund business with an incubator fund can save you over $20,000 during your first year of operations. A full-fledged hedge fund formation, with 12 months of accounting and year-end tax preparation, might cost approximately $30,000 with GreenTraderFunds (a great price). The second year’s accounting and tax will cost approximately $18,000. The GreenTraderFunds incubator fund package costs approximately $9,500 during your first year of operations, and $6,500 in the second year.

Our plan allows you to create a stellar — and marketable — performance record that conforms to all industry and accounting standards. When you are confident that investors are ready to join, you can engage GreenTraderFunds to prepare your investor offering documents and other legal paperwork, using our outside attorneys.

Choosing the wrong team can be a nightmare. Some attorneys are overworked, others sell cookie cutter documents and some can be very difficult to deal with. Attorneys may be done with you when they complete the documents, but GreenTraderFunds sticks with you for the life of your business in many areas of your operations. Some websites offer a document service, but they don’t have attorneys to review the documents, which can lead to trouble. Other sites promise a full solution, but they don’t have the experienced attorneys and CPAs. We have earned the trust of our clients since the founding of Green & Company CPAs in 1983.

Lower start-up costs
Most law firms want to sell you the blue prints and build the hedge fund all at once; they make more money that way. At GreenTraderFunds, we place our clients first and customize a flexible plan that allows you to build your fund in two separate phases. By using our incubator fund strategy, you break down the start-up process and related costs while avoiding redundancy: The two-step process usually costs no more than doing everything at once. We also design the fund with accounting and tax strategies in mind too. Some attorneys have complex terms that are hard to account for, which raises your fees.

• Phase I: Incubator. Create your hedge fund and management company (if needed) as legal entities. You begin building the fund’s performance history by trading with your own funds. This phase usually costs around $3,000. These figures are for setting up onshore funds (you pay state filing fees directly); the price for offshore entities is somewhat higher (and involves the use of offshore legal counsel).

For approximately $1,000 per quarter, GreenTraderFunds will prepare your fund accounting, which includes the performance record. We use FundCount software; your cost is a small license fee. FundCount has fantastic reports; we design the entire reporting system with you and our attorneys. We prepare your annual income tax returns for the fund and the management company. We can also prepare your individual income tax returns as well, all combined for an attractive price. Many important tax breaks from the fund and management company flow through to your individual tax return, so it’s best to use us for the entire tax preparation work.

• Phase II: Completion. Using our GreenTraderFunds outside attorneys, we prepare your offering documents, investor agreements, and other legal paperwork, and you begin accepting outside investors. For special-purpose funds and offshore funds, we also work closely with some outside law firms to provide Phase II services at excellent prices and customer service. We call the shots on tax strategies and much more, so their work fits nicely into our designs.

You can use the incubator strategy with any type of hedge fund. Whether you have a securities fund, commodities/futures fund, forex (currency) fund, onshore, offshore, master/feeder fund, or mini-master/feeder, our incubator strategy can save lots of money in your startup period.

The cost advantage of our Incubator Fund strategy is tremendous. Of course, if you already have investors lined up, you’ll want to skip the incubator phase and have the complete fund set up all at once. However, if you would prefer to move ahead in two steps, the initial cost savings are significant.

Separately managed accounts
Some of our clients prefer to start their investment management business as separately managed accounts rather than a hedge fund. We advise clients on licensing, investment adviser registrations, regulations, accounting methods, tax and business matters. We can form their management company, handle their investment adviser registrations, structure and prepare their advisory agreements, handle their investor accounting and offer tax advice to their investors. We have everything you need for separately managed accounts, with both onshore and offshore investors.

Establish a marketable track record
Unless you're well known as a successful trader in the financial services industry, with some pedigree, chances are you won't attract investors into your hedge fund until you can boast an excellent performance record. Of course, if you are thinking of starting a hedge fund, you probably have already had success trading your own accounts or trading professionally. Although prior experience in the markets is very valuable in many ways to a hedge fund manager, one thing it usually cannot provide are hard figures that can be presented to potential investors. Securities laws make it very difficult to use a manager’s prior performance figures to promote a new fund.

The problem with advertising prior performance is the fund manager must show that it is truly representative of what an investor could reasonably expect from the fund. Quite simply, the manager must demonstrate that prior apples are equivalent to present oranges. This is not easy. Trading one's own personal account or trading as part of a team at a large hedge fund are significantly different from trading in a startup hedge fund.

Creating a prior performance record is difficult and costly. Prior performance records must be audited for accuracy in accordance with GAAP (Generally Accepted Accounting Principles) and verified according to the standards established by the Chartered Financial Analyst Institute (AIMR-PPS and GIPS). The cost of hiring a specialized firm to perform verifications according to CFA Institute standards is quite high. An even greater obstacle, however, is that attorneys are very reluctant to allow the figures to be used in offering documents. Even if you pay accountants to verify that your figures conform to GAAP and AIMR-PPS / GIPS standards, most attorneys still will not include these prior performance records in offering documents because it exposes them to potential litigation from disgruntled investors.

If you have a great prior record and you plan to use the same trading program and environment in your new fund, it may well be worth the effort and cost to pursue this option. You will have to document that your prior trading strategies and working environment are very similar to your future fund trading strategy and environment. In the majority of cases, however, prior performance simply is not representative. And when it is, it is still quite possible that the potential benefits of verifying prior performance do not justify the associated trouble, expense and potential legal exposure.

Happily, the incubator fund is an attractive solution to the prior performance problem. Not only is our incubator fund economical, it generates a historical fund performance record that can be used to attract potential investors. Unlike prior performance — the manager’s investment success prior to starting the fund —historical fund performance doesn’t require verification. The historical performance record of the Incubator Fund is the record of the fund itself.

The bottom line is the majority of those wishing to start a hedge fund are better off skipping prior performance and setting up an Incubator Fund. If you want to avoid dealing with the cost, uncertainty and risk of crafting a prior performance record, you can use an incubator fund to generate the historical performance record that will appear in the fund’s offering documents. You only need a regular annual financial audit in accordance with GAAP. And even if you change the fund's trading strategy in the future, there is no requirement for verification to CFA Institute standards.

An incubator fund is flexible
Your life is easier during the incubator process. Since you don’t have investors in your incubator phase, it's much easier to prepare your accounting and NAV reports. There are no complex investor-level accounting issues. Annual tax preparation is also a snap; it's almost as easy as preparing tax returns for any trader entity. This saves you money and reduces your work and time with our professionals. Since most complications arise when investors come into the fund, an incubator fund can save you many headaches while you are getting your fund’s business operations in order.

You have time to fine-tune your business plan with an incubator fund. When your incubator fund is successful and you’re ready to meet with prospective investors, it's time to complete your hedge fund business plan and incorporate it into your offering (disclosure) documents. With the time afforded you in the two-step process, you can benefit from hindsight and experience. Maybe you want to change brokers, take soft dollars (or skip them), or change other operations like management team, systems and more. Since you can tweak your hedge fund business plan before preparing your offering documents, those documents will be more representative of your revised operations than if you created them on day one. Since these offering documents are the way you fulfill your disclosure obligations, the incubator approach provides added legal and compliance protection.

The incubator can be valuable even if you decide not to complete the hedge fund. If the incubator fund is successful and can attract outside investors, you will probably decide to move forward with a hedge fund and management company. If, however, you decide not go ahead and complete the fund, you can still take advantage of the entities created in the incubator phase, since they’re designed to accommodate business trading as well as hedge fund trading. You can use one or both of these entities to gain important tax benefits, such as retirement and health insurance deductions. Business traders often need an entity to create “earned income” in order to deduct contributions to retirement and health-insurance plans. Learn more about GreenTraderTax business entity tax strategies here and retirement-plan strategies here. This built-in contingency plan helps ensure that you receive the maximum value for every dollar spent with us.

The incubator fund allows you to start big or small. Many traders ask about the amount of money they should start with in their incubator fund. There is no minimum investment, though you probably will want to start with at least $25,000, which is the minimum required to establish a pattern day-trader account at a direct-access broker. To attract serious outside investors, you will want to consider trading $100,000 to $1,000,000 or more.

Incubator fund restrictions
Under federal and state laws, you’re not allowed to accept compensation in any form from investors, including yourself, during the incubation period. Nor can you accept funds from outside investors, except (in limited cases) from family and close friends. It is permissible to charge investors (and your own and related accounts) for their share of expenses, such as brokerage and bank fees or professional fees, incurred by the incubator fund while they were a member. Since you’re subject to fiduciary duty rules even with non-paying investors (which means you can be sued for losing their money), you should consult with an attorney before accepting other people's money into your incubator fund.

The bottom line
Starting your own hedge-fund business can be your ticket to financial freedom. However, it is a reality that most new businesses, including hedge funds, fail in the first year of operations. As you start your fund, plan wisely. If you decide on a low-cost, low-risk vehicle for getting your fund off to a solid start, talk to us about an incubator fund.

An article by Robert A. Green, CPA & CEO of Green & Company CPAs, LLC (GreenTraderTax). A prior version of Green's article was published in the November 2005 issue of Active Trader Magazine.

Soft dollars or hard trouble, look before you leap?

Are you a candidate for “soft dollars”? Larger brokerage firms generate excellent revenue streams catering to the many needs of hedge fund managers; some are labeled “prime brokers.” In addition to executing trades for commissions, some firms provide leverage (lend money) and package derivatives, and offer administration. Brokers are keen on hedge fund customers and many are willing to entice new hedge fund managers with “soft dollars,” a form of commission rebates on large volumes of trades by the fund. But don't count on being offered soft dollar deals unless you have a pedigree. Soft dollars are intended to cover research costs but some brokers stretch the concept (at regulatory risk) to include startup legal services, maintenance costs, equipment charges, and office space.

The SEC has stated that it intends to narrow the definition of soft dollars to its intended original domain of research only and to unbundled soft dollars from commissions (for more transparency with investors). Some brokers offer cookie cutter hedge fund legal documents to new managers, which can be dangerous. It's wiser to have an outside law firm with the necessary experience in hedge funds prepare your offering documents.

Consider that every “conflict of interest” needs to be disclosed in your offering documents. Understand that your management company may have a conflict of interest with your hedge fund (investors) and your brokers for “best execution.”

Your investors should come first under the fiduciary care rules which apply to hedge funds. But do investors come first if your broker pays most of your startup and operations costs (enriching your management company directly – that's you personally) at the expense of higher commission charges to your fund (investors)?

Investors pay for commissions and managers get commission rebates (soft dollars) directly (not back into the fund). Is it (legally) wise to have your prime broker prepare your offering document disclosures? Learn more about Best Execution rules in our Operations and Compliance section.

Many traders simply don't have the necessary pedigree required for the above-described special startup support deals. Lacking pedigree is all the more reason to get your performance record in order first with an incubator plan. How can you be successful without one?

We had a conference call on soft dollars on August 17, 2006.

New SEC rules on “soft dollars” (effective 1/24/07).

Hedge fund advisers use soft dollars (brokerage commissions paid in excess of the lowest rate, which is termed best execution) to buy goods and services. There is a statutory safe harbor in Section 28(e) for “research” – which the new rules define much more narrowly. You may need to revisit your documentation on brokerage fees.