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U.S. Hedge FundsThe United States offers easy and low cost access to all the legal, accounting, brokerage, and regulatory services you need to start a hedge fund. Take time to learn about the “light touch” of U.S. regulation and low costs associated with forming a U.S. hedge fund. If you are based outside the United States and want to setup a U.S. fund, read the information provided on this web page, see See World's Favorite New Tax Haven Is the United States and Read Our Leading Media Article "American the Beautiful Tax Haven". We set up equity, real estate, bitcoin, venture capital, forex, futures, and commodity funds. If you are not interested in setting up a U.S. fund, read our website to Learn More About Offshore Funds. Whether you want to set up a U.S. or offshore fund, continue to read our website or Contact Us!
How many investors can invest in a U.S. hedge fund? A Section 3(c)(1) fund is limited to 100 investors (35 of which can be non accredited investors). Learn More About Accredited Investors A Section 3(c)(7) fund is only open to “qualified purchasers.” A qualified purchaser (if an individual) must have a minimum of $5 million in net investments, or (if an entity or trust) a minimum of $25 million in net investments. The advantage of a Section 3(c)(7) fund is that the number of investors is not limited under the Investment Company Act of 1940 so a fund could take up to 1,999 investors before it is required to register with the SEC under the Securities and Exchange Act of 1934. In our experience the 3(c)(7) exemption primarily is used by fund sponsors backed by institutional investors. Contact Us for Help
U.S. Fund FormationTo start a U.S. hedge fund, you need two companies: the hedge fund and its investment manager/management company. A U.S. hedge fund is set up as either a Delaware Limited Partnership (LP) or Limited Liability Company (LLC). Both LPs and LLCs offer pass-through tax treatment and are not subject to company-level taxation. Investors in a fund set up as a LP or LLC are taxed on their pro rata share of the fund's profits. Don't make the mistake of forming your hedge fund companies before consulting with us. The best legal structure for your hedge fund is dependent on a number of tax, regulatory, and financial considerations. Learn More About Company Formations and Contact Us for Assistance
Why Delaware for U.S. Hedge Funds U.S. hedge funds are established in Delaware because Delaware has the best company law in the United States. Hedge fund sponsors based outside the United States can set up both a hedge fund and its management company in the United States without visiting the United States.
U.S. Investment Management Company (LLC) Many international fund sponsors set up a U.S. investment management company as a limited liability company (LLC) to minimize home country legal issues and to make their fund more attractive to investors. A typical structure is to set up the investment management company in Florida as a LLC for regulatory reasons and then tier a Delaware LLC above the Florida LLC to benefit from Delaware law. An LLC must have an operating agreement (OA). The OA lists ownership percentages among the principals, voting rights, share class rights and buy outs of principals. We not only form U.S. LLCs but also prepare customized OA's for LLCs with multiple owners, passive backers, etc. Contact Us for Assistance
Performance, Incentive & Management Fees Hedge fund managers charge a management fee based on assets under management (AUM) and a performance fee (also called an incentive allocation, the carried interest, the performance share, etc.)tied to the hedge fund's success. Learn More About Hedge Fund Performance and Management Fees Management fees can be charged to anyone. If you are not a state or SEC registered RIA, you most likely can charge performance fees to all of your investors. In some U.S. states, performance fees can be paid to a licensed RIA only when the profits of the fund exceed a hurdle rate or on an annual basis. We can advise you as to the permissible fee arrangements for your fund based on where you base fund management. SEC registered hedge fund managers can charge performance fees (i.e., the carried interest) only to “qualified clients”. Learn More About SEC RIAs and Learn More About Qualified Clients This rule also applies in some states to state registered investment advisers (RIA) but not all. Learn More About State RIA Be certain that your expectations about charging performance fees are correct. Contact Us for Assistance
Investment Adviser Registration (RIA) Only hedge funds that invest in securities require a fund manager to evaluate investment adviser registration. The definition of a "security" is broad and covers investment instruments, schemes and structures. Hedge funds that invest only in commodities, futures, currencies, real estate investments, or certain private equity investments may be subject to other rules. Hedge fund managers that advise venture capital funds are generally exempt from state or SEC RIA (registered investment adviser) registration.
A securities hedge fund manager based in the United States that manages over $150 million is required to become a SEC RIA. Learn More About SEC RIAs In most U.S. states, a fund manager that invests in securities and has less than $150 million under management must register as a state RIA. Some states offer an Exempt Reporting Adviser (we call it a "partial RIA license" due to its limitations) status for fund managers that operate "private" hedge funds as defined in that state's statute. Learn More About State RIA Formation and Contact Us For Help
A reason for a foreign fund manager to consider becoming a U.S. RIA is to satisfy a brokerage and/or bank’s requirement that a hedge fund’s manager be licensed somewhere. If your home country’s licensing requirements put investment manager licensing out of reach, consider getting licensed in the United States or in the British Virgin Islands. Any foreign based investment manager is eligible to register with the U.S. Securities and Exchange Commission (SEC) without regard to the amount of assets under management. The SEC registration process is very simple and streamlined. Learn More About U.S. SEC Registration
Timing a Fund LaunchIn general, a U.S. hedge fund takes about four (4) weeks to organize including the time needed to prepare offering documents, file SEC Form D in the EDGAR System and to arrange for the hedge fund's bank and brokerage accounts.
Fund Offering Documents(PPM) The offering documents are the documents that are provided to your investors and include: (i) a private placement memorandum; (ii) a limited partnership agreement or operating agreement (depending on whether the fund is formed as a limited partnership or LLC; and (iii) a subscription agreement, which includes a purchaser questionnaire to determine investor qualification. A thoroughly prepared set of offering documents should protect you from investor claims of lack of disclosure. Learn More About Hedge Fund Offering Documents and Contact Us For Assistance
Limited Partnership Agreement (LPA)The LPA (or in the case of an LLC-based fund, an operating agreement) is the legal governing document of your fund. It outlines the terms of the fund and the rights of an investor.
Subscription Agreement A subscription agreement (SA) provides your investors with a description of the steps necessary to invest in your fund. It requires investors to attest that they meet your fund's eligibility standards, such as being an “accredited investor” or “qualified client.” If your fund is an advertised fund under Regulation D Rule 506(c), it contains an "Accredited Investor Certification Form." Contact Us For Help
Hedge Fund Administration There is no legal requirement in the United States to use a hedge fund administrator. However, using one is a good idea as it can reduce the cost of an audit for the fund at year end and the costs associated with the preparation of a U.S. fund's income tax return (i.e., Form 1065 and K-1s). Hedge fund administrators provide detailed net asset value statements (NAVS), performance reports, brokerage statement reconciliation, tear sheets, and much more. Learn More About Hedge Fund Administration and Costs We offer low cost hedge fund administration services through Capital Management Administrative Services, LLC. Please see our Sample Performance Report and Contact Us for Assistance File SEC Form D & State Blue Sky Filings Form D is a notice of an exempt securities offering that is filed with the U.S. SEC and discloses information about the fund and the managers. Form D is not subject to a review or approval by the SEC and must be filed within 15 days of the first sale to investors. If your offering is ongoing, the Form D is refiled annually. Contact Us For Help Filing Form D & State Blue Sky In addition to the U.S. SEC, each state requires Form D notification filings. Learn More About Hedge Fund Law and Learn More About SEC Form D & State Blue Sky Hedge Fund Filings
Hedge Fund Banking & Brokerage Services For either banking or brokerage services, you cannot use your personal account as the hedge fund’s account. Need help with international banking and brokerage arrangements? Contact Us for Assistance
Dealing With Non-Accredited Investors If you allow non-accredited investors to invest in a U.S. fund, you need to have an initial financial statement prepared (i.e., an initial audit). Learn More About Hedge Fund Audits In addition, your non-accredited investors must (alone or together with a purchaser representative) be sophisticated and have sufficient knowledge and experience in financial matters to evaluate the merits and risks of investing in your hedge fund. You will need to use a Purchaser Questionnaire in addition to the standard Subscription Agreement if you allow non-accredited investors in your fund. Contact Us For Assistance and Learn More About Hedge Fund Offering Documents
Use of Investment Adviser Sub-Contracts Many hedge fund sponsors opt to set up a hedge fund management company outside of their home country or home state, whether for tax, commercial, or regulatory reasons. If you (as the hedge fund sponsor) set up the hedge fund management company outside of your home country or home state, you should have a sub-agreement for "consultancy" or "advisory" services between yourself and the offshore (or out of state) hedge fund management company. In the United States, an investment adviser is an investment manager. However, there is legal distinction between “investment manager” and “investment adviser” in most other countries. If you live in a country where a such a distinction exists and if you set up the hedge fund's manager in such a country, you should position yourself through contracts as a consultant to the offshore investment manager. Such "advisory" or "consultancy" services (i.e., an independent research analyst) is not a regulated business activity. To do this, you need an agreement between the offshore investment manager and a sub-agreement between the investment manager and the investment adviser. The goal of the agreements is to allow you to offer research services to the offshore investment manager for a fee. There are other approaches to consider as well. When the investment advisory agreement is drafted properly and timely executed, you will be able to control the timing, tax character and amount of taxable income reportable in your home country. In addition, if the investment management agreement between the fund and the investment manager are drafted correctly and timely executed, further income deferral is possible. A hedge fund manager seeking to defer substantial amounts of management and performance fees should use third-party (i.e., “outside”) directors to ensure that the deferral mechanisms are respected for home country tax purposes. Contact Us for Assistance
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