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Starting a Hedge Fund in 2009
Bart Mallon, Esq. Mallon P.C. bmallon@mallonpc.com

Overview ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ Initial Considerations Fund Characteristics Basic Structure Structural Issues Laws Regulation D Investors Registration Service Providers Timeline Offering Documents Costs Raising Capital Other Issues Disclaimer 2 of 18 © www.com .hedgefundlawblog.

Initial Items to Consider ‡ Who will be your investors? ‡ How will you get to where you want to go? 3 of 18 .

Hedge Fund Characteristics ‡ Trading Strategies ± Traditional ± Non-Traditional ± Other Pooled Investment Vehicles ‡ Fees ± 2 and 20 ‡ Taxation ± pass-through taxation ± tax benefit of allocation of performance fees 4 of 18 .

6.Basic Fund Structure Hedge Fund Investors (Limited Partners) Management Company (LLC) 1 Investors make investment in the Fund. Hedge Fund (LP) (Bank Account) 2. 5. payment to the Fund s bank account* 2 Manager wires money to the Fund s brokerage account* 3 Fund is managed by the Management Company 4 Fund makes investments 5 Fund pays Management Company a management fee (or may be paid from brokerage account)* 6 Fund allocates Management Company a performance allocation 7 If Investors make withdrawals. 3. Investments Fees Allocations Management Movement of money Withdrawal 5 of 18 . the Fund will make a distribution to investors* * Indicate where there would likely be wire fees 1. Hedge Fund (LP) (Brokerage Account) 4. 7. 7.

In-kind. Subsequent. High Watermark. Quarterly. Gate Provision. Hurdle Rate ‡ ‡ ‡ ‡ ‡ Management registration status Reports to investors Selling commissions Expenses Asset valuation practices 6 of 18 . In-kind. Maximum ‡ Withdrawal and Contribution Periods ± Monthly.Structural Issues ‡ ‡ Fund structure/ Investors Minimum Investments ± Initial. Distributions ‡ Fees ± Management and Performance. Lock-up. Yearly.

Hedge Fund Laws ‡ Securities Act of 1933 ± Interest in a fund are securities ± Regulation D safe harbor Securities Exchange Act of 1934 ± Funds with 500 investors and $10 million in equity must register Investment Company Act of 1940 ± Hedge funds exempted under Section 3(c)(1) and Section 3(c)(7) Investment Advisers Act of 1940 ± Requires investment advisers to register with the SEC ± Exemption under Section 203(b)(3) for advisers who have less than 15 clients over a 12 month period Commodities Exchange Act ± CPO and CTA Registration Other Laws ± Internal Revenue Code of 1986 ± Blue Sky Laws ‡ ‡ ‡ ‡ ‡ 7 of 18 .

accredited investors ‡ Definition of accredited investor ± $1 Million Net Worth ± $200.Regulation D ‡ Rule 506 ± No limit on amount of sales ± Generally only sold to accredited investors ± Can have up to 35 non.000 in income in last 2 years ‡ No General Advertising ± No newspaper ads ± No radio shows ‡ File Form D with SEC within 15 days of sale 8 of 18 .

500.Hedge Fund Investors Section 3(c)(1) Funds ‡ Limited to 99 investors ‡ Accredited Investor ‡ Qualified Client ± Natural person with a net worth of $1.000.000 ± Note: may be dependant on state law Section 3(c)(7) Funds ‡ Limited to 499 investors ‡ Qualified Purchaser ± Natural person with a liquid net worth of $5.000 9 of 18 .

Federal ‡ ‡ ‡ Under $25 million State only $25 .$30 million SEC or State Over $30 million SEC Section 203(b)(3) exemption Generally 2-4 weeks Compliance manual Exemption depends on state laws Generally 2-8 weeks Series 65 Potential net capital requirements Compliance procedures including potentially a compliance manual ± SEC ‡ ‡ ‡ ± State ‡ ‡ ‡ ‡ ‡ ‡ CTA or CPO Registration ± ± ± ± Registration with CFTC through the NFA Potential CTA and CPO Exemptions (but potential state issues) Series 3 Various compliance requirements 10 of 18 .Registration ‡ Investment Advisor Registration ± State vs.

fee calculations. registration. strategic and legal advice ‡ Administrator ± provides fund NAV calculation. investor reporting. ‡ Auditor/ Accountant ± provides yearly fund audit. entity formation. etc. marketing. operational guidance etc 11 of 18 .Hedge Fund Service Providers ‡ Lawyer ± drafts offering documents. custodian of assets ‡ Consultant ± provides consulting services to management company re: fund raising. prepares tax forms for the manager and investors ‡ Prime Broker ± provides execution and/or clearing services for trades.

is office space secured? ‡ Week 3 ± discussion and revision of offering documents with attorney. begin to get ready for trading or selling interests in your fund ‡ IA registration and CTA/ CPO registration will affect this timeline usually add about 2-4 weeks to the schedule assuming that the principals have all required regulatory exams and also provided that there are no prior regulatory actions 12 of 18 . begin thinking about operational issues which may arise are your computers ready. fund).Hedge Fund Timeline ‡ Week 1 ± discuss fund structure in depth. establish bank account. begin talking with outside service providers ‡ Week 2 ± receive draft of offering documents. establish brokerage account ‡ Week 4 ± tie up loose ends. finalize offering documents. organize legal entities (management company. begin finalizing outside service provider contracts.

Offering Documents ‡ Private Placement Memorandum (PPM) ± ± ± ± Similar to mutual fund prospectus Discussion of important structural terms Discussion of investment program Information on management company and managers ‡ Limited Partnership Agreement (LPA) ± Governing legal document ‡ Subscription Documents ± Subscription agreement ± Investor suitability questions 13 of 18 .

Costs to Start a Fund ‡ Lawyer ± Range from $17. 14 of 18 .500 ± Larger funds may also pay a fee (x bps) on AUM ‡ Audit ± Audit: $5. registration extra ± My firm will be about $13.000 (boutique) to $35.000 depending on a number of factors including number of investors and the Audit firm ‡ Prime Broker ± Varies depending on strategy.000 depending on a number of factors including Audit firm ± Tax Prep: $4. staff salary.000 15. registration from $3. trading volume ‡ Business Expenses office rent.$1. etc.000 .500 if necessary ‡ Administration ± Range from $750 .000 for a basic domestic long-short fund.$10. computers and IT.500 per month. compliance costs. office equipment.$1. Initial one time set-up fees range from $500 .000+ (BigLaw) for a basic domestic long-short fund. investments. telephones.

Raising Capital ‡ Must be done pursuant to Regulation D ‡ Who ± Friends and Family ± Institutional Investors ‡ Marketing Materials ± Powerpoint Pitchbooks ± One Page Tearsheets ± Appropriate Disclosures/ Disclaimers ‡ Outside Marketing ± ± ± ± Hedge Fund Databases Hedge Fund Industry Events Capital Introduction Services Third Party Marketers 15 of 18 .

Other Issues ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ ‡ Incubator hedge funds Offshore hedge funds Taxation ERISA and IRA investments New Issues Rule Soft Dollars Side Letters Due Diligence Blue Sky Filings 16 of 18 .

Any discussion herein is not a substitute for seeking actual legal advice from a licensed attorney with knowledge of the rules and regulations governing the industry. or warranties as to the accuracy. I make no representations. Presentation is subject to the Circular 230 Notice on the disclaimer portion of my blog. I am not providing tax advice. guarantees.Disclaimer ‡ ‡ ‡ This presentation was made for informational purposes only. This presentation does not establish an attorney-client relationship between myself and the user. currency. completeness. I am not providing legal advice to any user. This may be considered to be attorney advertising in some jurisdictions. 17 of 18 ‡ ‡ ‡ ‡ . or suitability of the information provided via this presentation.

com Please send questions.hedgefundlawblog.For Voice Presentation. please see: www.com .com © www.hedgefundlawblog. comments or suggestions to Bart Mallon at bmallon@mallonpc.

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