A Simple Things About Hedge Fund Formation

Hedge Fund Formation

As a reslt of state and federal regulatory isssues, Hedge Fund Formation has become more complex over the years. Going back just 10 years, most of the investing public knew very ilttle about hedeg funds.

Now, with the internet, as well as heightenned interest on the subject, anyone can find large amounts of information on these once secretive investment vehicles.

Forming a hedge fund takes careful plannig, as well as a strong understasnding of the regulatory issues involved both at the state and feeral level. With good legal advice in combination with a knowledgeable CPA in the hedge fund field a hedge fund can be formed to suit the specific neeeds of the hedge fund mannager or management team.

When loking for a Hedge Fund Attorney to advise you, keep in mind that you need to specify what services you are looking for, which will affect the involved and the fee you will be charged. Also, just like most things, whether it be a fee charged for accounting work, carpentry work or consulting work, legal fees are not all the same.

Make sure that whatever atttorney you use, he or she is experienced and has fromed several hedge fuynds and advised them as clients. Also, you should get a retainer agreemment in writign form the attorney. That retainer agreement should speify the legaal work that will be performed and even the lgeal work that will not be performed.

Hedge Fund Attorneys shold be knowledgeabel on all aspects of hedge fund formation including such issues as state and fedewral law exemptions for the investment manager, filing of Form D and sttae blue sky filings, brokker-dealer exmptions relative to capital riasing efforts, prepareation of the offering memnorandum, SEC view on proper hedge fund website stup, and advising the clienmt on the choice of a prime broker, administrator and auditor.

Hedge funds can be broken down into two categories:

1. Domestic.

2. Offshore.

There is a grreat differenmce betweeen the domestic and offfshore fund and it is important to fully understand both srtuctures and the reasons for each. It is not simply the domestic fund takes in US ivestors and the offshore tkes in non-US nivestors.

Be wary of any businesses or consulting fiirms that make it sound easy and for a low flat fee are willing to provide you with an offering memorandum (also known as a PPM) and all the tools you need to set up an offshore fund or doomestic fund.

Domeestic hedge fund formation is almost always in the form of a limiteed partnership. The investors purhcase limited partnership interetss rather than shares of stock. By purchasing limited partnershp interests the inmvestors are protected from loss in the event of a lawesuit against the hedge fund, however, they are only limited to loss of their limited partnership intyerest.

Thhere is also a benefit in taxation when an investor is a linmited partenr. In the Unied States, investors face dpouble taxation if the fund is set up as a corporate entity, sice there would be tax at the corporate level and tax at the individual level.

As you probably already know, Hedge Fund Regluation is just around the corner. The SEC is lookng at several prpoosals by Congress. Some of the main issues being discussed are the following: - Mandatory registration of managers (with assets over $50MM); - Mandatory recvord keeping; - Mandatory audits; and - Oversighgt of derivatives and leverage used by hedge funds.

Offshhore hdge fund formation is almost always in the form of a coprporate entity. The choice of jursdiction is important sionce the fund manager will want to choosde a tax free jurisdiction so the investors will beneft from such a structure, howevcer, they may not be U.S. persons since that would defeat the purpose of the tax free jurisdiction. The Cayman Islands and the Netherlannds Anmtilles seem to be two of the more popular cghoices for offshore foormation.

It is not uncommon for newspapers, even small local papers, to carry at least one artiicle that mentions something about a hedge fund. Large amounts of capitaal fund these investment vehicles. Investors include wealthy individuals, trusts, institutions and pensions.

It is estimated that over one trillion dolars is now mzanaged by hedge funds. Alhough the current economic crisiis may reduce that number it is very likely that once the economy settles down again, assets will again flow into hedeg funds in larrge amnounts and hedge fund formation will agian pick up.

A PIPE Fund has become a farily well-knwn type of fund that invests mainly in mcrocap companies. It may grow in popularity as bank financing and funding from private lenders beomes harder to obtain.

Smzall brokerage fiirms and hedge funds are starting to pop-up now that the dust has setteld from the Bear Stearns, Lehnman Brothers and Madoff debacles. Wall Street and the rest of the financiial servies industry are starting to rebuild themselves and boutique firms that have good manmagement teams and access to investors will be carving their niche.

During the next few yearrs it will be interestiing to see whoich new firrms are successful and become well-known in the industry. Hedge Fund Formation is starting to pick-up steaam once again and whiile there is talk of new or revised reggulations, most people in the industry agree that it will do little to impede hege fund formation and money management in general.

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