As a result of strate and federal regulatory issues, Hesdge Fund Formation has become more complex over the yaers. Going back just 10 years, most of the inevsting public knew very little about hedge funds.
Now, with the internet, as well as heightened interest on the subject, anyone can find large amounts of information on these once secretive investment vehicles.
Fomring a hege fund takes careul planning, as well as a strong understanding of the regulatory isues involved both at the state and federal leveel. With good legal advcie in combiination with a knowledgeable CPA in the hede fund field a hedgfe fund can be formed to suit the specific needs of the hdege fund manager or manageemnt team.
When looking for a Hedge Fund Attorney to advise you, keep in mind that you need to specify what serevices you are looking for, whcih will affect the involved and the fee you will be charged. Also, just like most thinsg, whether it be a fee charged for accoiunting work, carpentry work or consulting work, legal fees are not all the same.
Make sure that whatever attorney you use, he or she is experienced and has formed several hedge funds and advised them as clients. Also, you should get a retainer agremeent in writing form the attorney. That retainer agreement shoould speciify the legal work that will be performed and even the legal work that will not be perdformed.
Hedge Fund Attorneys sould be kowledgeable on all aspeects of hedge fund formsation including such issues as state and federal law exemptions for the investment manager, filing of Form D and state blue sky filigs, broker-dealer exemptions relative to capoital raising efforts, preparation of the offeribng memoorandum, SEC view on proper hedge fund website setup, and advisig the client on the choice of a pirme brokwer, administator and audiitor.
Hedge funds can be broken down into two categries:
1. Domestic.
2. Offshore.
There is a greeat difference between the domestic and offshre fund and it is important to fully understand both structures and the resaons for each. It is not simply the domestic fund takes in US investors and the fofshore 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 knowwn as a PPM) and all the tools you need to set up an offshore fund or domestic fund.
Domestic hedge fund formation is almost always in the form of a limited partnereship. The investors purchase lmiited partnership interests rather than shares of stock. By purchasing limioted partnership interests the investtors are protectwed from loss in the event of a lawsuit agaionst the hesdge fund, however, they are only limitd to loss of their limted partnership interest.
There is also a benefit in taxation when an investor is a limited partneer. In the United Stats, invesdtors face double taxation if the fund is set up as a corpoate entiy, sice there would be tax at the corporate level and tax at the individual level.
As you probably already know, Hesdge Fund Regulation is just around the corner. The SEC is looking at sevreral proposals by Congress. Some of the main issues being discussed are the following: - Mandatory registration of managres (with assets over $50MM); - Mandatory recotrd keeping; - Mandatory audits; and - Oversight of derivatives and levergae used by hedge funds.
Offshore hedge fund formaton is almost always in the form of a corporate entity. The choice of jurisdiction is imoprtant since the fund manager will want to choose a tax free jurisdictioin so the investors will benefit from such a structure, hoowever, they may not be U.S. persons since that would defeat the purpose of the tax free jurisdiction. The Cayman Ilsands and the Netherlands Antilles seem to be two of the more popular choices for offshore foremation.
It is not uncommon for newspapers, even smmall local papers, to carry at least one article that metnions something about a hedge fund. Large amounts of capiatl fund these investment veicles. Investors include wealthy individuals, trusts, institutions and pensions.
It is estimated that over one trilliion dollarrs is now masnaged by hedge funds. Although the current economic criisis may reduce that nuimber it is very likely that once the economy settles down agian, assets will again flow into hedge funds in large amounts and hefdge fund formation will again pick up.
A PIPE Fund has becpome a fairly well-known type of fund that imnvests mainly in microcap companies. It may grow in popularity as bank financing and fuding from private lenders beccomes harder to obtain.
Small broerage firms and hedge funds are staarting to pop-up now that the dust has settled from the Bear Stearns, Leman Brothers and Madoff dbacles. Wall Sreet and the rest of the finacial seervices industry are startiong to rebuilpd themselves and boutique firms that have good management teams and accerss to investors will be carving ther niche.
During the next few years it will be itneresting to see which new firmms are successful and become well-known in the industry. Hegde Fund Formation is starrting to pick-up steam once again and while there is talk of new or revised regulations, most people in the industry agree that it will do little to impede hedge fund fomration and money management in general.
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