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A couple friends of mine and I are looking to lose some money and end our friendship so have come up with the bright idea of opening up a hedge fund incubator fund. Without getting into the innumerable reasons why this is a bad idea (we think we have a decent idea of the downside), I was wondering if any here in the Fatwallet Finance community have opened up a Hedge Fund Incubator Fund and might be willing to provide some tips on a low-cost way to set this up and administrate on-going? (Yes I did search FW and came up with a goose egg. Google searches gave me quite a lot of direction (as have some friends), but I honestly find there is nothing quite like the collective FW wisdom.) Thanks in advance!

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Hedge Fire! (27.34kB)
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Just skip the formalities and just drop all the money on H&B.

Bonus points for anything that leads to eventual divorce or any uncomfortable situations that lend themselves to blackmail with your co-founders.

I am just guessing here, but you all want to lose money in hedge funds, but dont have the minimum required amount to get a hedge fund manager to waste time with you individually, but if you pooled your money to lose together then it would work?

I guess if thats the case, check out laws regarding investment groups/partnerships/LLCs and basically your investments are all in the hedge fund.

ebaynoob said: A couple friends of mine and I are looking to lose some money and end our friendship so have come up with the bright idea of opening up a hedge fund incubator fund.What do you mean? You want to provide capital and a platform for other people that want to start hedge funds? If so, which parts do you need help with -- and which parts have you already got covered? Capital? Technology? Access to startups? Relationships with brokers?

LH2004 said: ebaynoob said: A couple friends of mine and I are looking to lose some money and end our friendship so have come up with the bright idea of opening up a hedge fund incubator fund.What do you mean? Thanks guys for your comments. I was a bit afraid to throw this question out there for fear of being flamed to high-heaven. I'm glad you all have received this question well. Let me try to give a little more background:

The three of us have been swapping investment tips and strategies quite successfully for the past several years (we each represent different industries, etc.) and individually have done quite well with our investments. We want to see how successful we would be if we added some structure to our collective investment discussions. First thought was to form an investment club and just use this to invest together. For a variety of reasons (particularly possible potential to scale in the future) we have decided that a Hedge Fund Incubator would be most appropriate. We would not be looking for any additional investors in the incubation stage. One of us would be responsible for executing all trades. The three of us realize that there is a chance (likelihood?) we may never again see any money we drop into this thing so would only be throwing high-risk $'s into it. We also realize that if we go about this the wrong way we will turn on each other like cats and dogs and not only lose our money but lose our friendship. I was hoping to keep this thread from discussing pros/cons etc of opening a hedge fund incubator and that is why I opened with the tongue and cheek ("looking to lose some money"--thanks for the graphic DM!). We are really keenly interested in seeing if any folks here have actually done this (have advised others who have or know someone who have) and have any tricks of the trade to share.

Make sense? If not, please feel free to ask more questions. Thanks again!

Yeah, I have done this. I am not going to go into a lot of detail (don't have the time) but here is the basic concept.

No-one is going to invest in a new Hedge fund. You need to establish a track record. I am not a Physician however I have a network of "friends" that are Physicians. This network wanted to find other Physicians to buy into a Hedge fund that purchases ownership in Home Health Companies. They asked if I wanted to join the group and I said yes. We decided to start a Hedge Fund after about 3 or 4 lunch meetings. We were quoted about $52,000 for the first year to start it up by a law firm out of San Francisco, CA.


We decided to do a incubator fund and I think we paid $6,213 for the first year to a law firm.

The key is to go slow but not so slow that you loose forward movement. Your goal with a incubator fund should be to establish a track record for your hedge fund. The law firm will create your hedge fund and management company as legal entities. You begin building the fundís performance history by trading with your own limited funds. When we interviewed law firms, a lot of them pressured us to make the incubator fund a off shore legal entity. I am not sure why but this is a BIG deal with attorney's who do incubator funds. We decided that we wanted to stay as a US entity as when investors here "off shore" they get a bit nervous.


We required all members to come to the table with 10k and we had 10 friends. This gave us $100k to start with. We were told by all of the attorney's we interviewed that we were extremely under funded at 100k and they would expect us to have closer to 250k or more - especially if we were dealing with Home Health companies. We then kicked up the initial investment for our group from 10k to 25k and 3 of the 10 people backed out.

After 4 months, we were able to replace those 3 individuals and had our 250k initial investment.

Does this help answer your question?

Thanks WhiteGuy! I hope to hear others with stories like yours. That is exactly what I was really hoping for!! (I love FWF!)

I have alot of questions....realize you are busy, feel free to pick and choose!

* In addition to your legal counsel did you utlize any other advisors? (e.g. accountant?) How did you locate them?
* Also did you find any books/magazines/websites/associations helpful as you stepped through this process? (If so which ones?)
* How onerous did you find the on-going reporting requirements? How much our your annual admin costs?
* How did you all decide to govern yourselves (e.g. Do you need to consense on all investment decisions or have you empowered a single member?) How often do you meet?
* Are your funds held in a brokerage? If so, did you guys shop around much? If so, who were the winners of this search?
* Overall, are you pleased with your decision to embark on this?
* Anything you would do differently?
* Any other general tips as we get started?

Thanks again!!!

WhiteGuy said: Yeah, I have done this. I am not going to go into a lot of detail (don't have the time) but here is the basic concept.

No-one is going to invest in a new Hedge fund. You need to establish a track record. I am not a Physician however I have a network of "friends" that are Physicians. This network wanted to find other Physicians to buy into a Hedge fund that purchases ownership in Home Health Companies. They asked if I wanted to join the group and I said yes. We decided to start a Hedge Fund after about 3 or 4 lunch meetings. We were quoted about $52,000 for the first year to start it up by a law firm out of San Francisco, CA.


We decided to do a incubator fund and I think we paid $6,213 for the first year to a law firm.

The key is to go slow but not so slow that you loose forward movement. Your goal with a incubator fund should be to establish a track record for your hedge fund. The law firm will create your hedge fund and management company as legal entities. You begin building the fundís performance history by trading with your own limited funds. When we interviewed law firms, a lot of them pressured us to make the incubator fund a off shore legal entity. I am not sure why but this is a BIG deal with attorney's who do incubator funds. We decided that we wanted to stay as a US entity as when investors here "off shore" they get a bit nervous.


We required all members to come to the table with 10k and we had 10 friends. This gave us $100k to start with. We were told by all of the attorney's we interviewed that we were extremely under funded at 100k and they would expect us to have closer to 250k or more - especially if we were dealing with Home Health companies. We then kicked up the initial investment for our group from 10k to 25k and 3 of the 10 people backed out.

After 4 months, we were able to replace those 3 individuals and had our 250k initial investment.

Does this help answer your question?


This sounds like a huge stark law violation. How did you get around it?

I will answer your questions but let me highly suggest two firms to review/check out. Meyers & Heim LLP out of NY are good but not cheap. Since this is FatWallet - let me tell you about the company we went with. "The Green Company". You can find their website here You call and will get a free consultation with an attorney and a CPA. They get you from nothing more then just a thought to actually having a fund in about 6-8 weeks for around $5,000. We had them do some extra work for us thus our bill came out to $6,000+


1) The law firm we went with has a CPA on staff. We use the CPA to do all the taxes/accounting stuff. This seems to go pretty well and especially since he is part of the law firm's staff - he has access to all of the information he may need about our accounts.

2) There actually is an association called Hedge Fund Association (HFA). They have a newsletter and a message board although their message board is not nearly as popular as FatWallet. Their newsletter is more of a piece of junk mail /spam then it is a newsletter.

3) The company we hired does all of the reporting requirements for us and sends us a copy. Total time spent from me? I spend about a hour to double check they did it right on a quarterly basis. Our annual admin cost are 2.5% of the total value of the fund. As the fund grows, gets more investors etc you will have some weight and can use that to negotiate your admin cost but we are too small and have no negotiating powers at this point in the game.

4) We made this extremely messy on purpose to avoid any takeover. The goal was no single person could loose all of our money or take over the fund (Our Attorney said takeovers happen a lot in incubator funds). We have a group of 10 people. We made 1 person (the guy who started the group) the Supreme Leader, President and Chief Executive Officer (What a title!). Now he is not allowed to make any changes without 51% of the other people agreeing and his vote does not count. (I told you this was a messy) We meet once a month for lunch or dinner. When we first set the fund up, we were meeting twice a week for a few weeks. We feel the Supreme Leader should come to the monthly meeting with all of his ideas on what should happen. We then vote but he does not get a vote


5) The Green Fund also operates a brokerage. It's not the cheapest but they made it so simply/easy to work with that we just went with that for a convenience factor. I plan on suggesting that we change this in the future as we grow.

6) Very happy. Returns have been around 4% after fee's. This is not great but as we grow and build a better track record, I expect this 4% rate of return to increase and be closer to 8-9%

7) Trust the attorney. I am stuck with 9 Doctor's. Doctor's think they know EVERYTHING!

This sounds like a huge stark law violation. How did you get around it?

Most of the Physicians work in the local Hospital specifically within the Radiology and Laboratory Departments. As a result of their low patient contact, they do not refer out to Home Health very frequently. If one of them did happen to refer a patient out to Home Health - I would hope they would do that ethically and legally.

WhiteGuy said: This sounds like a huge stark law violation. How did you get around it?

Most of the Physicians work in the local Hospital specifically within the Radiology and Laboratory Departments. As a result of their low patient contact, they do not refer out to Home Health very frequently. If one of them did happen to refer a patient out to Home Health - I would hope they would do that ethically and legally.


My understanding of the law is even if one of the other physicians in their original group (all hospital doctors) referred patients to their home health company that would be a stark violation. Has this question not come up in the past? Ethics has no meaning when it comes to the Stark law. Medicare can eat you alive with even the smallest violation. I would really recommend having a lawyer who specializes in stark law look over what you are doing before someone blows the whistle. It will usually be a disgruntled patient that knows the law and looking for a payday.

why is this threaded moderated?


edit: Huh.... it was just my response to the above quote.

I don't get it. What is going on mods?

Something in your post caught the attention of our spam filter. When that happens, we have to examine the post before we allow it to go live. There's nothing wrong with it. Sorry about the inconvenience.

I've removed duplicate entries to keep the thread tidy.

A fund like this can be backed by real estate right? I have a group of friends as well who want to invest in real estate but I dont know how to structure it, this sounds like something I would be interested in.

blok: Yep, you can do a Incubator fund and choose to only buy real estate. If your fund grows and gets a proven track record, out side investors may want you to manage their money for them.



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