CPO/Hedge Fund

The CPO/Hedge Fund structure is actually a bit easier from the dealing firm stand point, but much harder from an administrative and compliance perspective. However there is one distinctive advantage to the Hedge Fund model that many people fail to see. This is the resale value. Going into any business, you need to assess the total profitability of the project. Your exit strategy must be predefined, whether it is walking away from the business entirely or selling the business. With the hedge fund structure, you as the fund manager, are actually the one holding the client assets, whereas with the CTA structure the dealing firm is holding them. By having the assets you actually have the ability to sell them to another firm thus the hedge fund structure provides you with a much higher resale value than a CTA.

What many people typically do is start out as a CTA to start generating a track record then eventually convert their product into a hedge fund. This way they can start building a track record with the smaller barriers to entry of a CTA and eventually shift the investors into the hedge fund structure that has larger barriers to entry but higher resale value.

The CPO structure requires a bit more work to set up. First you need to have one pooled bank account with a fund administrator where you take in the investments. You can use a fund administrative company for this purpose. They will keep appropriate accounting on your fund and distribute proper statements to the investors.

The CPO then invests the money that is in their bank account into the forex dealing firm and keeps it in one trading account. All profit/loss distribution and fee allocation is calculated by the fund administrator. All deposits and withdrawals are also handled by the fund administrator.

There are some firms that will not only provide you with fund administration and creation but will also market for you. Typically the fund set up process costs roughly $20,000 and the administration may costs roughly $5000 per month depending on the size of the fund itself.

One thing to keep in mind is that with the CTA the investor is always in possession of his own money. He has the account opened at the FCM in his own name. Should he choose to stop trading and make a withdrawal he can contact the FCM and the power of attorney form will be revoked almost instantaneously, and he can withdraw his money. However with a hedge fund the investor actually parts with his money and sends it to the bank account of the hedge fund. All withdrawals and deposits have to take place with the hedge fund manager rather than the FCM. So if you use the CPO/Hedge fund structure you need to be able to demonstrate to the investor that you have a large and well capitalized firm.

To find out more specific regulatory requirements for a CPO please visit www.nfa.futures.org. Or you can contact a large well qualified introducing broker, such as TradersChoiceFX, who works with other hedge fund clients in order to be directed on proper set up.