- Risk of mismanagement, shutdown-after-bad-year, outright fraud.
- High annual fees and profit-sharing fees.
- Limiting minimums: usually $5,000,000 net worth needed to invest.
- Limiting maximums: the more well-run, the sooner the door closes.
- Spiritual appeal. Supporting needy causes instead of high-paid managers.
- Less mismanagement risk. Continuity and transparency via individual mirrored accounts.
- Instant trust funds, revocable or irrevocable. Easily done if personal decisions are not required.
- Tax benefits. The Coop might establish trust situs in any favorable state.
- Bequeathment harvesting. 10% or so to the Coop when a trust dissolves.
- Idea harvesting. Aging investment savants may share and mentor their ideas.
- Low overhead. Idealistic managers well-content with $10,000 monthly or so.
- Unlimited asset management. Autotrading, discussed below, enables unlimited strategies.
- Philanthropic Funds, Micro Funds and turbocharged management. Discussed below.
Mirrored autotrading has significant pitfalls. Many autotraded accounts take high risks with reasoning as questionable as encountered by Lewis Carroll's Alice behind the looking-glass. There may be software fees and limited choices of brokers. Mirroring accounts often experience sub-par performance due to bid/ask spread. Nonetheless, autotrading can include sensible strategies. Sub-par performance can be minimized with inexpensive software and behavior modifications. A reputable mirror-manager can recommend a reputable financial planner, to be sure strategy choices are appropriate. Technically, there do not seem many wrinkles which could not be ironed out.
At minimum, mirrored autotrading could be considered a significant enhancement of the well-established newsletter genre. Investment newsletters are generally obfuscatory in performance claims and generally restricted to simple suggestions which, even so, only a minority of investors has the discipline to follow. With mirrored autotrading, the suggestions are automatically followed, which may include options and short-selling, and a clear record is generated.
Perhaps this dilemma can be resolved by catering to venture philanthropists--who might agree to 50% profit-sharing which goes to an Emergency Pool, and also seed the Emergency Pool with interest-free loans. This Emergency Pool could gradually repay these loans while investing with a leveraged long-short strategy--while also being required to make interest-free loans to the Hedge Fund after quarterly downturns, with repayment required only from above-peak gains. Thus in compensation for the high profit-sharing, "turbocharging" the rebounds with no added risk to investors. The Emergency Pool should budget something like 1/3 of assets for turbocharging annually, thus possibly draining itself during a recession. Nonetheless, inasmuch as investments are worth investing in, inevitably amassing huge assets. In addition to charitable possibilities, there can be enough with which to turbocharge some ordinary trust accounts managed by the Coop, perhaps in exchange for increased "bequeathment harvesting" as listed above. Thereby indirectly sharing Hedge Fund gains with average investors and with charities. To minimize red tape, no claim need be made except having discretionary access to free leverage.
A superior possibility, using new legal standards pioneered by Bernett Capital Management, is that a Coop might directly challenge the norms by creating a Hedge Fund that accepts investments as low as $1,000--and if necessary to remain within practical limits, gradually lowering the maximum that each investor may compound annually. Thus turning the traditional rich-get-richer bias upside-down: assisting the largest possible number of investors and being equal to all. I intend to research the possibility of Micro-Investment Hedge Funds in depth, and will post findings in the comments below.
Of course, any such plan will need to be worked out with a lawyer. Straightforward information is posted at InvestmentLawGroup.com on "Launching An Incubator Hedge Fund." Many basic questions are also answered at HedgeFundLawBlog.com. MergersAndInquisitions.com posts a sobering 2011 article: "So You Think You Can Start a Hedge Fund?" This and most articles seem to imply that it is not very feasible to operate a Hedge Fund with less than $10 million AUM. This seems to concur with the minimum requirements for prominent databases used by investors to find Hedge Funds. However HedgeCo.net operates a database which seems to require only $1 million AUM, and also posts advertisements for "Start A Hedge Fund" packages costing as little as $10,000. FWallStreet.com also posts a roguish 2008 article, "Start Your Own Hedge Fund," which implies that do-it-yourself costs might be less than $3,000. Bernett Capital Management also points out that federal law does not require any minimum AUM, nor registration as an investment adviser until there are 15 investors, in its page: "What is a Hedge Fund?"
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