Offering Legal & Fiduciary Services to Traders | Investors | Hedge Funds Hedge Fund Business Plan & Checklist
Getting Started New hedge fund managers face a maze of regulatory and tax considerations, investor reporting requirements, and business operation issues. Managers must also balance investor relationships, capital raising, developing their investment strategies, and a myriad of other roles. Experienced and committed service providers play a vital role in guiding managers through their various responsibilities. A skilled team of service providers helps managers avoid devastating mistakes and can free them to perform their most important roles of raising capital and executing the fund’s investment strategy. Choosing the right team of service providers can mean the difference between an emerging fund’s success or failure.It’s essential that you gather a group of service providers that can help you. Contact Hedge Fund Attorney Hannah Terhune if you want to discuss these services or if you have any questions. Informed clients are our best clients!
Engage a Hedge Fund Attorney Choosing a hedge fund attorney is the most important decision you will face. You should seek fund a lawyer with substantial knowledge of the hedge fund industry from both a regulatory, legal and business perspective. It is also vital that your lawyer is committed to working directly you through all aspects of the fund formation process. When picking a lawyer to help you, keep legal startup costs in mind. Legal startup costs can be paid for either by the fund or the fund manager and your decision as to where to expense these costs has important consequences for the fund. We keep those costs manageable and advise you as to the tax and financial consequences of your decisions. We advise you on applicable regulatory obligations including required filings, examinations and registrations. You can reach us readily by telephone, email, and Skype. A good hedge fund lawyer such as Hannah Terhune can help you start your hedge fund. Contact Us First
Determine Your Hedge Fund Launch Date Assuming registration as an investment adviser and/or as a commodity pool operator is not required, you should be able to launch your hedge fund in 4 weeks or less. If any registration with the regulators is required for the fund manager (i.e., as an investment adviser or as a commodity or forex pool operator) give yourself at least a few months to launch the hedge fund.
Evaluate (RIA) Investment Adviser Licensing Requirements Determine whether you must register as investment adviser (RIA) with the SEC, your home state, and/or the NFA. If you trade forex or managed futures in your hedge fund, you must register with the U.S. National Futures Administration (NFA) unless an exemption applies to you. Learn More About Commodity Pools and Forex Trading In those states where the hedge fund manager must register as an investment adviser, the FINRA Series 65 Exam is required unless the state is satisfied with some other credential such as a Certified Financial Planner license. If you are licensed, you can advertise your advisory services. Learn More About Our RIA Formation Services
Define the Terms of the Hedge Fund You are creating a unique financial product. Complete the Hedge Fund Terms Sheet Questionnaire that we provide to you as a client. We will work with you to identify, define, and provide examples of the core elements of hedge fund offering documents based on our experience. Core elements include the hedge fund's investment objective, investment strategies, management team biographical data, hedge fund performance fees, hedge fund management fees, hedge fund redemption, hedge fund lock-ups, hedge fund risk disclosures, etc. Learn More About Hedge Fund Offering Documents
Hedge Fund Offering DocumentsWe prepare the core documents necessary to launch the fund: a private placement memorandum, a limited partnership agreement or limited liability operating agreement, a subscription agreement, an investment management agreement, and a management company operating agreement. The Private Placement Memorandum (PPM) provides investors with material information about the hedge fund. The PPM provides specific information about the terms of the fund, the structure of the investment, and the background of the managers. Learn More About Hedge Fund Offering Documents
The Limited Partnership Agreement (LPA) (or in the case of an LLC, the LLC Operating Agreement) is governing document of the hedge fund. The LPA outlines the powers and activities of the general partner (typically also the fund manager); fees and expenses, including management, performance and administrative fees, fund organizational costs, allocations and distributions of profits to all partners, how profits are calculated, withdrawal provisions, lock-up periods, gate provisions, and distribution dates; etc.
The Subscription Agreement provide fund managers with information about the investor. This is the investor’s contract with the fund, which specifies the subscription amount and outlines the terms under which the investment is being made. This document requires investors to attest that they meet certain eligibility standards, such as being an “accredited investor” or “qualified client”, as required by SEC regulations and state law.
The Management Company Operating Agreement is the legal governing document that provides for the rights of the founders of the fund.The investment management agreement is an agreement between the fund and the investment management company (often the same entity as the general partner). It defines the services that a fund manager will provide. It also assigns to the fund manager a power of attorney over the fund’s assets, including the contributions made by the limited partners, and gives the fund manager discretionary authority to manage such investor funds in a manner consistent with the investment strategy of the fund. Since the fund manager and the fund are controlled by the same individuals, the investment management agreement is typically signed by the same individuals on both sides.
SEC Form D and other Blue Sky FilingsIn the United States, a notice of sale on SEC Form D must be filed for any hedge fund offering under Regulation D. SEC Form D is filed electronically with the SEC and Form U-2 is filed for the hedge fund in many states. We prepare and file SEC Form D for your hedge fund and the blue sky filings for the states where you expect find investors. File your blue sky filings within the appropriate time -- either before distribution or within 15 days of the first sale in that state, depending on the state's rules. Learn More About Blue Sky Filings and SEC Form D
Hedge Fund Administration You do not need to hire an administrator to for a small fund. However, it is a good idea if you do not have time to deal with hedge fund accounting. There is no legal requirement in the United States to have an administrator. Offshore, local country law may require a (licensed) administrator for a recognized or regulated hedge fund. The administrator acts as an intermediary between the fund’s managers and investors. The fund administrator provides accounting services for the hedge fund. The administrator calculates the net asset value (NAV) of the fund portfolio, calculates performance and management fees, and creates account statements for investors. An administrator can be hired to process investor subscriptions. In some situations, the administrator will control the movement of cash through a “second signer” service, designed to provide investors against hedge fund fraud. A “second signer” or "cash movement" agreement requires the fund’s management to obtain a signature from the administrator prior to making a transfer to or withdrawal from the fund’s bank and/or brokerage account. Administrators are important not only because of the service they provide but because they are independent – they provide a check on the claims made by the investment manager. Good fund administration lowers the cost of year end tax return preparation and the cost of an annual audit. We offer hedge fund administration services out of our Wilmington, Delaware Office through Capital Management Administrative Services, LLC. Learn More About Hedge Fund Administration
Initial & Annual Audits If you allow non accredited investors in your U.S. hedge fund, you will need as initial "launch" audit under Regulation D. If your U.S. hedge fund has any non accredited investors, it will need an annual audit as well. Madoff had an auditor for his fund too…but it was a fake audit. Required by law or not, an annual audit garners a lot of credibility with investors. The auditor works with the hedge fund manager and administrator to prepare the fund's financial statements. Audited financial statements contain a wealth of information not only about the financial position of the fund, but also regarding key decisions the fund has made and expenses. We maintain a list of PCAOB (required by the Securities and Exchange Commission and some state security boards for RIA) and non PCAOB auditors. The PCAOB is directed by the Sarbanes-Oxley Act of 2002 to establish auditing and related professional practice standards for registered public accounting firms to follow in the preparation and issuance of audit reports. Contact Us For Assistance
Investor Relations and Communications Prepare the monthly or quarterly statements for your investors and send out with your cover letter. Continue to attract investors and raise capital. Learn More About Hedge Fund Marketing
Brokers/Introducing/Mini-Prime Brokers & CustodiansYou will need to open a bank account for the hedge fund and a brokerage account. The hedge fund can have more than one bank and brokerage account. A prime broker is a central broker through which the fund executes most or all of its trades and that acts as custodian of the fund’s assets. When the hedge fund executes trades through other brokers, the prime broker works with the executing brokers to settle Investor subscriptions should be deposited in the hedge fund's bank account and then transferred to the fund's brokerage account. Most retail online brokers now offer an institutional desk that caters to hedge funds and fund management. We offer hedge fund manager the option to have an attorney controlled trustee bank account for their hedge fund where the trustee controls cash movement. It is a popular service and solves the "control of cash movement" issue for fund manager while making the hedge fund more attractive to investors. Prime brokers also provide leverage and margin, facilitate short sales, provide soft dollar arrangements, perform portfolio analysis, and other services. Most prime brokers are not able to service a hedge fund until it reaches $10 million or more in assets under management. However, a mini-prime broker or introducing broker acts as a liaison between a hedge fund and the large prime brokers, providing startup fund managers access to the full range of services provided by prime brokers. We can suggest introducing brokers or prime brokers appropriate for your fund.
Form the Hedge Fund and its Investment Manager To start a hedge fund you need to create the fund entity and its investment management company. In the United States, the hedge fund is established as a limited partnership and in some cases, as a limited liability company for offerings with multiple share classes. Learn More About Incubator Hedge Funds and Learn More About Starting a Hedge Fund Your hedge fund management company can be set up in your home state. If you do not plan to stay in your home state, we then suggest Florida as the best location for the hedge fund's investment manager/general partner. Most jurisdictions require that all companies incorporated or operating there appoint a local party to represent the entity and be accountable. This service is provided by management companies, often run as sister companies of law firms or administrators. Our sister company, Capital Management Administrative Services, LLC provides Registered Office Services in Delaware.
Independent DirectorsHistorically speaking, offshore Directors were appointed primarily to ensure that an offshore fund was not deemed to be an onshore vehicle by the onshore tax authorities (mind and management were, therefore, kept offshore to the greatest extent possible). As litigation and losses started to hit some funds, however, the expertise and fees of those directors has increased and their role is changing. There are two common models of Independent Director available, one is the full Independent, Non-executive position, usually provided by an individual in a similar style of service as you might expect from a non-executive director at any listed company or perhaps a mutual fund. These directors either act completely alone or within a collection of similar individuals operating as a group in much the same way as a traditional legal partnership would. The second model is the full service, ‘independent directors as a service’ business model. In this instance you have a number of individuals that act as the actual directors but the primary value is driven by the large infrastructure backing them up, ensuring that documentation is kept in order, meetings are held on time and the fund is proactive in staying on top of regulatory developments within the industry.
Obtain IRS Tax Identification Numbers We prepare and file IRS forms to obtain the Employer ID Numbers (EIN) for the hedge fund and the hedge fund manager from the IRS. You will need these tax identification numbers to open the hedge fund's bank and brokerage accounts only if you want to open such accounts in the United States.
(RIA) Investment Adviser Registration. If you need to register as an investment adviser, start the registration process early. This process should start concurrently with the development of the hedge fund as the investment adviser registration process can take a few months in some states. You should sign up for the Series 65 examination unless your state accepts an equivalent certification or credential. Obtain study materials and pass the Series 65 Exam. You must complete any state registration application forms. Learn About Investment Adviser Registration
Forex Trading If your hedge fund will also trade in spot forex, your fund is also a forex pool. You need to start the process of becoming a member of the NFA very early on (unless an exemption applies to you). Learn More About Forex Funds and NFA Registration
Commodity Trading If your hedge fund will also trade in futures contracts, commodity options (including options on futures contracts), leverage contracts involving certain precious metals, futures contacts and commodity options traded on a board of trade, or foreign futures and foreign options, your fund is also a commodity pool. Unless you operate an exempt commodity pool, you will need to register as a commodity pool operator with the NFA. You must take the Series 3 Exam and start the process of becoming a member of the NFA. Learn More About Commodity Pools and NFA Registration
SEC Form D and other Blue Sky Filings In the United States, a notice of sale on Form D must be filed by the issuer in connection with any offering under Regulation D. SEC Form D is filed electronically with the SEC and Form U-2 is filed for the hedge fund in most states. We prepare and file SEC Form D for the hedge fund and the blue sky filings for the states where you expect to distribute your offering documents and accept investors. Learn About Hedge Fund SEC Filings
Finalize Regulatory Licenses Registrations If you registered as an Investment Advisor or with the NFA as a Commodity Pool Operator, ensure that the regulators have approved any such applications.
Hedge Fund Marketing and Sales Deposit your seed capital and start the initial trading of the fund. Start distributing your hedge fund offering documents and attracting investors. Keep a log of all individuals to whom you distribute your hedge fund offering documents. We provide you with a form you can use for this purpose. You can use a web site that is SEC compliant to administer the hedge fund. You cannot use the web site to market the hedge fund and find investors. You cannot advertise to the public in the United States unless you register your hedge fund with the SEC under rules governing hedge fund advertising. In that case, the SEC has to review and approve your ads for the hedge fund. Work only with licensed brokers. The SEC is cracking down on unlicensed broker activity. For example, read "SEC Continue Crackdown on Unregistered Broker-Dealers".
Call Us First We are experts in international hedge funds and tax. Click on any reference below to our leading articles:
Strategic Hedge Fund Planning by Hannah Terhune. Wilmott Magazine Ltd. (Volume 2013, Issue 63, pages 8-11 January 2013).
Trading Foreign Index Contracts? Know the Tax Rules Before You Trade by Hannah M. Terhune and Roger D. Lorence. Stocks, Futures and Options (June 2005).
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Capital Management Services Group, Inc. is recognized by discriminating persons as being one of the foremost legal authorities in the hedge fund industry. Attorney Hannah Terhune's extensive international tax and hedge fund knowledge and experience make her an indispensable resource for those starting a hedge fund or an investment management business. Ms. Terhune's numerous articles on hedge funds and international tax matters have appeared in publications worldwide. Read Our Leading Media Content and Articles by Hannah Terhune on Hedge Funds and International Tax Planning, Chances are, if you have read anything related to starting a hedge fund, Ms. Terhune wrote it. Read Our Client Comments and Read About Hannah Terhune on LinkedIn. When you engage us you get a unique combination of securities, tax, and business experience. We think we have the best set of hedge fund offering documents in the industry. We aim to deliver quick turnaround times because we understand that our Clients want to begin operations as soon as possible. Give us the opportunity to use our knowledge and experience for you. No client is too large or too small for us. We pride ourselves in providing personal attention to each Client. We provide high quality services at competitive rates. But don't take our word for it, give us a call and let us prove what we can do for you.
Personal Consultations Ms. Terhune's hard-earned knowledge and experience can be put to work for you. You can get answers to your specific questions by speaking directly to Hannah Terhune in a consultation. A consultation represents an invaluable opportunity to learn how to achieve more in less time. Ms. Terhune's credentials and experience gives you access to a well-informed lawyer with sound ethical judgment. The availability of such expertise required to recommend the best solutions to you and provide sound ethical advice should never be taken lightly and unsurpassed in the area of hedge fund development. We are confident that when you are finished with your consultation you will be impressed and more informed about your business plans than ever before. Call +1 (307) 213-4732 or Click Here to Request Services.
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