I think I might want to form an investment club for trading futures. I'm not sure about the right entity framework however (partnership, etc), and hope that those with some experience in running/participating in investment clubs or other investment entities might be able to comment on what might be most appropriate to my situation. I've read a lot about stock investment clubs on the web (somearchiveddiscussion), which seem like what we might want. Conventional wisdom for stock investment clubs suggests formation as a general partnership.
In hopes of providing any relevant information since I'm not sure what all will be relevant, I'll try to preemptively answer some questions and give some additional details about what we hope to achieve.
The basic idea A small group of friends and myself foolishly think we have a good way of trading certain futures. Questionable I know. We intend to trade maybe 2-3 times per month, so somewhat frequently - not day trading really, but certainly not "buy and hold" (or "buy and roll" I guess). We might trade a similar amount in a few different futures areas.
Why trade futures instead of stocks or mutual funds or ETFs? Are you just being weird, or do you think "futures" are some magical esoteric way to make money? This part is actually a thoughtful and conscious choice (quite possibly unlike most questions around here about trying to get into futures trading). Retail futures commissions are pretty low (for example at Interactive Brokers) and spreads are very tight on most futures, much tighter than on specialty ETFs and still better for most major indexes too. Trading as frequently as we intend, mutual funds would (rightly) accuse us of timing/excessive trading and hit us up for large fees. Futures trading also allows much lower margin/capital requirements compared to trading equivalent stocks, which is also important to get better returns (if it works). Taxes are 60% long term gains for all futures trading regardless of holding period, which is a nice advantage especially when you're doing short term trading.
Why do you want an investment club instead of just a partnership? Just a guess - an issue I hope someone can comment on. On one hand, there's lots of guides and accounting software and off-the-shelf stuff for investment clubs; however most of the "infrastructure" out there to help clubs is for stocks and doesn't say anything about handling futures so this may be of limited use (or maybe I just didn't look hard enough). Clubs also seem like they might sidestep potential regulatory issues(?) of investing other peoples' money. If the non-club route meant we have to get someone registered with NASD or CFTC by taking the right exams, we can certainly do this but would obviously rather not have to bother.
Why don't you just trade this stuff separately and avoid the whole entity question? It's not because of my love of filling out K-1's each year that's for sure. Like Berkshire Hathaway whose shares are ~$5K or ~$150K a piece, you might need to find a few friends to pitch in to buy a single share. Futures contracts (even mini's) are for nominal amounts in the $10K's to $100K or so. We were thinking of pooling our resources in order to buy a single contract of one or two different types, since alone we might only want to buy 1/3 of a contract each and hence couldn't afford* to. (* - to be precise, we could easily afford the minimum margin alone, but don't want to face the infrequent but possibly large margin calls alone and would like to spread those risks)
You know you're going to get some huge margin call one day right? Yes and we're prepared for this. If we put up only the maintenance margin of $5K on a $100K nominal futures contract, a big move could require us to put up $20K or more to avoid being stopped out. If everyone is willing to provide their share on additional capital on short notice, this shouldn't be a problem and we'd agree to have cash on hand for some sufficiently large amount. On the other hand, these margin calls are times are when we are doing poorly and how could we protect ourselves if one of the members reneges on their promise and refuses? Effectively they are getting us stopped out at a bad time, when we hope not to have to close out our position. Since there's no equity in a cash settled futures position when you get a margin call, we wouldn't have any easy way to get money from the party in question without litigation. I'm open to suggestions on this front. Massively overcollateralizing is one possibility, but would just depress returns most of the time.
What's your Secret Idea and can I invest in it after you're sure it works? If it works, it stays a secret sorry (ask nicely and maybe you can invest in our hedge fund later, ask for the FWF discount to get 2-and-25 instead of 3-and-30 ). On the bright side, if it doesn't work maybe we'll change our partnership's focus and switch to selling fancy CD's on late night infomericals where our Hired Babes be more than happy to tell you all about our Amazing Future Millions System for only $39.95, call now!
Any advice, suggestions, or pointers to other areas I should research are most welcome. If nothing else, I hope my questions managed to be more humorous than average . Thanks!
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What products are you trading that a single player can't put up enough money to handle the margin and adverse moves for a single contract position, esp with eminis?
It sounds like you are either undercapitalized or need to work on more realistic stop losses in your system.
xerty said:You know you're going to get some huge margin call one day right? Yes and we're prepared for this. If we put up only the maintenance margin of $5K on a $100K nominal futures contract, a big move could require us to put up $20K or more to avoid being stopped out. If everyone is willing to provide their share on additional capital on short notice, this shouldn't be a problem and we'd agree to have cash on hand for some sufficiently large amount. On the other hand, these margin calls are times are when we are doing poorly and how could we protect ourselves if one of the members reneges on their promise and refuses? Effectively they are getting us stopped out at a bad time, when we hope not to have to close out our position. Since there's no equity in a cash settled futures position when you get a margin call, we wouldn't have any easy way to get money from the party in question without litigation. I'm open to suggestions on this front. Massively overcollateralizing is one possibility, but would just depress returns most of the time. Generally this is resolved by having capital call provisions in the agreement, but this doesn't mean that you'll get the money. Generally a line of credit is used to get through this but the associated interest expense should be the responsibility of the party that failed to answer the capital call, rather than an expense allocated to all the members. If they want or ask to get out, then their proceeds should be net of this expense.
winter said:What products are you trading that a single player can't put up enough money to handle the margin and adverse moves for a single contract position, esp with eminis?I'm not talking about a bad day or two. I'm talking about really big market events like the 9/11 aftermath where everything went down and down some more. If that or a subprime crisis or somesuch comes around to clobber our positions once every 1-2 years, so it still seems wise to plan to have additional margin funding provisions (assuming you don't want to get stopped out).
ChiefRocka said:xerty said:... these margin calls are times are when we are doing poorly and how could we protect ourselves if one of the members reneges on their promise [of additional capital]? Generally this is resolved by having capital call provisions in the agreement, but this doesn't mean that you'll get the money. Generally a line of credit is used to get through this but the associated interest expense should be the responsibility of the party that failed to answer the capital call, rather than an expense allocated to all the members. If they want or ask to get out, then their proceeds should be net of this expense. I think if it's just matters of timing, we can handle things with a line of credit and bill tardy investors for some extra interest. I'm more concerned about someone who gets cold feet about holding a position when the group still agrees to and balks on adding capital. Cash settled futures aren't like a stock where there's still some equity in the position (just less if the stock falls), so that we could tap easily and reduce that member's stake. When you get a big margin call, there's basically no equity left and quite possibly you owe them a fair bit. This is what I mean by no obvious way to bill a member if they decide they want out at some inopportune time. I suppose trading several different future contracts means their share of a little maintenance margin elsewhere would be available (assuming those contracts aren't moving against us too) but that's still probably not enough for the types of risks we're trying to provision for.
BEEFjerKAY said:talljay said:"Trading" and "investing" are not the same.
In a sideways market, "trading" and "investing" are *exactly* the same thing.
You appear to be confusing "investing" and "trying to make money".
Please note that I am not making a value judgment between any of these. I certainly don't tie myself to one strategy.
Edit to add: My point was/is that while futures can be traded and used as hedges, they cannot themselves be used as an investment (as I understand the word). I think it is confusing to the less sophisticated to use "invest*" as a blanket term for anything that can make money.
I was actually thinking about this too, although not with futures. More like I'd like to run sort of a mini hedge fund or "investment partnership" that could invest in anything from stocks, bonds, notes, etc. I know several people who'd be willing to put up 10-20K, so obviously I'm talking fairly small time here. From my brief google searches though it doesn't seem like there's any easy way to do this without spending lots of money to meet regulatory compliance issues. Anyone have any insight?
BEEFjerKAY said:talljay said:"Trading" and "investing" are not the same.
In a sideways market, "trading" and "investing" are *exactly* the same thing.
Everyone out there who thinks indexing and "buy and hold" are the be-all and end-all didn't have any money in the stock market in 1968-1981.
First, that's a relatively short time period. The periods before/after that were much better. Second, even in the worst case that you invested all your money in 1968 and sold all your equities in 1981 it wasn't *that* bad.
Here are annualized REAL rates of return for various market segments: Small growth: -1.24% Small blend: 3.77% Small value: 6.86% Large growth: -2.85% Large blend: 0.34% Large value: 3.83%
So if you had a decent amount of value/small in your portfolio and not just large growth stocks you didn't fare poorly at all. Sure it's not the *best* period for equities, but it's hardly a "sideways market".
First of all, let's get a few things out of the way. 1. Those of you who know me can vouch that there may be no more "anti-trading" FW member. I would have to go check to be sure, but it is entirely possible I have not had a single buy or sell transaction in my taxable or tax-advantaged brokerage accounts in about 3 years. I develop a strategy, implement that strategy, take corrective actions as necessary, then let my strategy work for me. Life's been good.
2. 1968-1981 was just 13 years and 13 years can be a short time. I rarely keep a car less than 13 years. Someone else can describe (should they care) the whipsawing actions and events of that era. Let's put 13 years into a more current context. 1994 was 13 years ago. There essentially was no Internet. The Berlin wall had just fallen. Housing was, in relative terms, cheap. Oil was cheap. In historical terms, 13 years is less than a blip. In personal terms, 13 years is getting up and facing an investment world that may have changed overnight ... 4745 times in a row.
I plead guilty to confusing "investing" with "making money". I would go so far as to say that if something does not make me money, I am more likely to call it "charity" than "investment". I would like to "make money" without "investing" but, when you put it in those terms, it sounds a lot like "work". Or something else more physically attractive folks might be able to pull off.
For a period of time I "invested" but unhappily did not "make money". Those were not happy days for anyone other than my broker, who sent me a nice card every holiday season.
In all seriousness, there's more than one form to an "investment". In this case, I'm interested in OP's proposition since it goes completely contrary to my strengths. And, as a contrarian, that means I am inevitably drawn to it.
Those willing to do my investment strategy backtesting might do well to go research how commodities did during 68-81. Or to compare volatility with rate of return for various investment vehicles during that period. Just in case I missed something while watching all those "Rockford Files" first run.
What can you do with e-minis that you can't do with SPY? I know you can leverage your assets, but you can also do that by selling bonds and buying stocks, and through many other methods. I'd be very reluctant to join an investment club when there are probably other methods you can use to accomplish your goals.
There's no law that says you have to use only the minimum margin money needed to trade. One e-mini S&P futures contract has a margin of $3938 right now. Typical fund managers trade no more than one or two contracts for every $100,000 of equity. That's 12.5 or 25 times the minimum margin requirement. There MOST LIKELY won't be a margin call, and if the market moves so much that there will be a margin call, the brokers will be jumping from high buildings and we'll have much worse things to worry about.
Unlike the stock market, the margin money for futures can be kept in a T-bill earning interest. Interactive Brokers pays similar interest rates on all account deposits over $10,000. So you get your investors to put up the money IN ADVANCE, pointing out that it's earning interest for them anyway so it's no big deal...
exante said:What can you do with e-minis that you can't do with SPY? Get a 33% discount on my trading taxes? Short term SPY trading would be taxed at 35%, while futures trading would be taxed at 23% (40% @ 35% for short term, 60% @ 15% for long term). That's about a 1/3 reduction in taxes, or if you prefer a 19% increase in my after-tax profits just for trading a tax-favored instrument.
I know you can leverage your assets, but you can also do that by selling bonds and buying stocks, and through many other methods. Leverage is also an important factor, and you get up to 20x or so with futures contracts very easily. For SPY all you can get is 2x (overnight), and your broker charges you some unreasonable rate like 8-10% interest for the privilege. I would imagine wishing to somewhere in between 2x and 20x most of the time, mostly towards the lower end.
When you say "selling bonds" what would you actually propose I do? Have my partnership issue debt or get an unsecured LOC? That'll be at an awful rate and a pain in the ass to boot. Short some treasury bond ETF? Now I'm paying extra spreads and commissions, plus my broker is going to screw me on the short rebate. Actually try to short treasuries in the cash markets? Won't I need a prime broker for that instead of just Interactive Brokers or some other decent retail trading firm? In addition, it's quite nice with futures that you can easily have a variable level of leverage/margin by choosing to add more or less collateral, while most other leverage methods have fixed costs associated with each change to your debt level.
CreditGuy said:Unlike the stock market, the margin money for futures can be kept in a T-bill earning interest... So you get your investors to put up the money IN ADVANCE, pointing out that it's earning interest for them anyway so it's no big deal... Maybe that'd be best if/when we have outside investors rather than just structuring this for ourselves. I understand the interest on the collateral is important too, but I don't think I'm going to want to put up all the collateral for the "expected worst 1-3 year drawdown" just in case I'll need it. Or rather, of course I'll need to have the assets somewhere, but I'd rather not tie up all that "risk capital" investing in treasuries rather than other types of securities like stocks or index funds (which could be sold immediately if need be in the case of a large, unexpected drawdown).
I agree there are some benefits to futures trading. It just seemed that the capital requirements were more than you could handle alone. I have to wonder, if you are in the 35% income bracket, why are e-minis too large for you to trade? An e-mini contract is equivalent to trading 500 SPDRs. You should be able to do this using your own funds. Also consider the options market. I suggested selling bonds as a way to increase leverage, assuming you have something like a bond fund that you could sell. The coordination issues in your scheme appear problematic.
exante said:What can you do with e-minis that you can't do with SPY? I know you can leverage your assets, but you can also do that by selling bonds and buying stocksOne example: Trade short term and have 60% of the gains taxed at long term rates. OP mentioned this as an advantage.
exante said:I have to wonder, if you are in the 35% income bracket, why are e-minis too large for you to trade? I just used the 35% income bracket as an example. A lot depends on your personal situation, whether your state income tax gives capital gains preferential treatment or not, whether you're in the 5% vs 15% long term gains bracket, etc. In any event, the advantage is there and is significant, maybe 10-15% extra after-tax gains for futures vs stocks in my personal case (vs a 20% maximum benefit).
As for sizing, one e-mini wouldn't be a problem for me but would be for some members of the group who have less to invest - it's still not that small depending on how much you want to worry about collateral. When you want to start trading several different futures contracts simultaneously you run into the same problem again however.
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). Retail futures commissions are pretty low (for example at Interactive Brokers) and spreads are very tight on most futures, much tighter than on specialty ETFs and still better for most major indexes too. Trading as frequently as we intend, mutual funds would (rightly) accuse us of timing/excessive trading and hit us up for large fees. Futures trading also allows much lower margin/capital requirements compared to trading equivalent stocks, which is also important to get better returns (if it works). Taxes are 60% long term gains for all futures trading regardless of holding period, which is a nice advantage especially when you're doing short term trading.
. Thanks!
