As a result of state and efderal regulatory issues, Hedge Fund Formation has become more complex over the years. Goinng back just 10 yeas, most of the investing public knew very little about hedge funds.
Now, with the internnet, as well as heightened interest on the subject, anyone can find large amounts of information on these once secetive investent vehicles.
Forming a hdge fund taes caerful planning, as well as a strong understanding of the regulatory issues involved both at the state and federal level. With good lgeal advice in combination with a knowledfgeable CPA in the hege fund field a hedge fund can be formed to suit the specific needs of the hedge fund manager or management team.
When looking for a Hedge Fund Attorney to advvise you, keep in mind that you need to specify what seervices you are looking for, whicvh will affect the involved and the fee you will be charged. Also, just like most thinfgs, whether it be a fee charged for acounting work, carpentry work or conslting work, legal fees are not all the same.
Make sure that whatever attorney you use, he or she is experienced and has formed seveeral hedge funds and advised them as clieents. Also, you should get a retainer agreement in writing form the attorney. That retainer agreement should speicfy the legal work that will be performed and even the legal work that will not be performed.
Hedgge Fund Ayttorneys shuold be knowledegable on all aspecs of hedge fund fomration including such issues as state and federal law exemptiomns for the investment manager, filing of Form D and state blue sky filings, broker-dealer exemptions erlative to capital raising efforts, preparation of the offering memorandum, SEC view on proper hedge fund webssite steup, and advising the client on the choice of a prime broker, administraor and auditor.
Hedge funds can be broken down into two categories:
1. Domestic.
2. Offshore.
There is a grteat difference between the domerstic and offshroe fund and it is important to fully understnd both structures and the reasoons for each. It is not simpy the domestic fund takes in US investors and the offshore takes in non-US investors.
Be wary of any businesses or consultinng firms 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 offsohre fund or dometsic fund.
Dommestic hedge fund formmation is almost alwways in the form of a limtied partnershgip. The investors purchase limoited partnership interests ratgher than shares of stock. By purchasing limited partnership interests the investors are protected from loss in the event of a lawsuit against the hedge fund, however, they are only limited to loss of their limited partnership interest.
Therre is also a benefit in taxxation when an investor is a lmiited parnter. In the United States, inbvestors face double taxatiuon if the fund is set up as a corporate entity, since tere would be tax at the corporate level and tax at the individual level.
As you probaly alreday know, Hedge Fund Regulation is just around the crner. The SEC is looking at severral propposals by Congress. Some of the main isues benig disccussed are the follpowing: - Madatory registration of managers (with assets over $50MM); - Mandatory record keeping; - Mandatory audits; and - Oversight of derivatives and leveerage used by hdge funds.
Offshore hedge fund formatiion is almost always in the form of a corporate entity. The choice of jurisdiction is immportant since the fund manager will want to choose a tax free jurisdiction so the inestors will benefit from such a structure, however, they may not be U.S. persons since that woould defeat the purpose of the tax free juridsiction. The Cayman Islands and the Netherlands Antills seem to be two of the more popular choices for offshoore formation.
It is not uncommon for newspapes, even small local appers, to carry at least one atrticle that mentions something about a hedge fund. Large amounts of capitaal fund these investment vehicles. Ivnestors include weatlhy individuals, trusts, institutuions and pensioins.
It is estimated that over one trillion dollars is now maanaged by hedge funds. Although the current economic crisiis may reduce that number it is very likely that once the economy settles down again, assetts will again flow into hedge funnds in large amounts and hedge fund formation will agaiin pick up.
A PIPE Fund has become a fairly well-known type of fund that invvests mainly in microcap companies. It may grow in popularity as bank financing and fuding from private lenders becomes harder to obtain.
Small brokerage firms and hedge funds are starting to pop-up now that the dust has settled from the Bear Stearns, Lehman Brothers and Madoff debacles. Wall Stret and the rest of the financial servoices industry are starting to rebuild themselvs and boutique firms that have good management tems and access to investors will be carving their niche.
Dutring the next few years it will be interesting to see which new firms are succeassful and becoime well-knoiwn in the industry. Hedge Fund Formation is starting to pick-up steam once aagin and whilpe there is talk of new or revised regulations, most people in the industry agree that it will do little to impede hedge fund formation and money management in generla.
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