ALL ABOUT HEDGE FUNDS

What is a Hedge Fund?

 Hedge Funds are unregistered, privately offered investment

pools subject to the terms of an investment agreement entered
into by the sponsor of, and investors in the hedge fund.

 Hedge funds adopt different investment styles and strategies

and invest in a wide variety of financial instruments. As they are
unregulated, they have the freedom to invest in any instrument,
market or currency

 Hedge funds agree to repurchase their own interests from

investors on a limited, periodic basis. This may or may not be
following an initial “lock-up period” during which time investors
are not permitted to liquidate their investments.

 Most hedge funds are highly specialized, relying on the

specific expertise of the manager or management team.
Kinds of Hedge Fund

Fund
Fundofof
Fund
Fund

Off-shore
Off-shore Managed
Managed
Fund
Fund Account
Account

Kinds
Kinds
OfOf
Hedge
HedgeFunds
Funds
Domestic
Domestic Stand- Alone
Stand- Alone
Fund
Fund

Master
Master Managed
Managed
Feeder
Feeder Office
Office
FUND OF FUNDS

 A FOHF is a hedge fund that utilizes a multi-manager, multi-strategy

approach by investing all, or a significant portion, of its assets in hedge
funds.

 FOHF can invest in as many underlying hedge funds as they choose

 Institutional investors often choose to invest in FOHF, rather than in

single-manager hedge funds, in order to diversify the risks associated
with a particular hedge fund adviser.
MASTER - FEEDER

 The Structure generally involves the use of a master fund

company (incorporated in a tax-neutral off-shore
jurisdiction such as the Cayman Islands or Bermuda) into
which separate and distinct “hub” or feeder funds invest.
 Funds Management happens at the Master level
 U.S taxable investors invest through Limited partnership
feeder fund.
 Non-US and US tax exempt investor subscribe through
the off-shore feeder
DOMESTIC FUND

 A domestic hedge fund is one that is organized within the

United States. If the fund is organized in the U.S., all U.S.
laws will apply.

 Engineered to cater to U.S. investors who are liable for

paying income taxes. They are structured as limited
partnerships, with the general partner being the portfolio
manager, and the qualified clients as the limited partners.
OFFSHORE FUND

 Funds structured under foreign law, or located outside the

U.S. are designated as “offshore hedge Funds” The
advantage is that the investors in the fund are not subject
to United States taxation.

 Not registered in the United States or with the SEC,

provide privacy benefits as well as tax advantages. Not
subject to U.S. income on distributions received from the
fund or to U.S. estate taxes on fund shares. Generally,
exempt from withholding taxes because the funds are
located outside the United States.
Who can invest in a hedge fund?
Who can invest in a hedge fund?

 Banks, savings and loans association, whether acting

individually or as a fiduciary

 Any broker or dealer, insurance company, investment

company

 Employee benefits plan, if the investment decision is made

by a plan fiduciary or if the employee benefit plan has total
assets in excess of $5 million or is a self-directed plan,
with investment decisions made solely by persons who are
accredited investors
 ACCREDITED INVESTOR

 An individual with net worth, (or combined net worth of the

individual and spouse) in excess of $1 million.

 An individual whose income, excluding any income

attributable to the spouse, exceeds $200,000 in the
previous two years.

 Joint income of the individual and spouse is more than

$300,000 in the previous two years.
 QUALIFIED PURCHASER

 Individuals who own $5 million or more in investments,

including investments held jointly with a spouse.

 Family-held business that owns $5 million or more in

investments.

 Business that has discretion over $25 million or more in

investments

 Trust sponsored by qualified purchasers

Constituencies

Hedge Fund
Manager

Fund
Investor
Administrator

Hedge Fund

Prime Broker Agents

Executing
Broker
FUND MANAGER

 General Partner/ Advisor / Sponsor

 Manages portfolios, trade research and develop
products
 Raise capital and manage client relationships
 Solicits Investors on Own or through Agents
 Often invest significant amounts of their own money
into the hedge funds that they manage.
 Responsible for funds performance- Fiduciary
 Compensated by Incentive Allocation Fees and
Performance Fees
EXECUTING BROKER

 Fund managers get their trade transactions

executed by entities who are called as
executing brokers or the trader.
 The trades are effected through accounts
with those brokers in the name of the prime
broker for the benefit of the hedge fund.
 After executing a trade, the executing broker
and the hedge fund advisor report the
details to the prime broker, who clears the
trade and provides custody of the securities.
PRIME BROKER

Front Office:
 Trading Desk
 Sales
 Stock Loan

Middle Office:
 Relationship Management
 Introduce new products to Hedge Funds
 Roll out technology (Trading Systems, Enhanced
Trades)
 Enter into New Relationship
 Capital Introduction
PRIME BROKER

Back Office:

 Clearing & Custodian

 Reconciliation
 Valuations
 Corporate Actions
 Reporting
 Compliance
 Derivatives
ROLE OF A FUND ADMINISTRATOR
 FUND ADMINISTRATOR
 Daily accounting and recording of all transactions
and reconciliation between broker and client
accounts

 Calculation of daily, weekly and monthly Net Asset

Values

 Calculation of management fees and performance

allocations , creation of fund pricing policy

 Processing of investor contributions and

withdrawals ensuring compliance , distribution of
investor statement, independent valuation of
portfolio, shareholder register
 FUND ADMINISTRATOR

 Review of fund prospectus, arrangement of service

level agreements, project management, advice on
issues impacting choice of fund domicile, structure

 Preparing detailed board packs for board meeting,

assisting with tax adjusted records, tax estimates and
filing, compliance

 Liasion with regulatory bodies, co-ordiantion of

transparency to investors
Entity Relationship

Hedge Fund

Fund Administrator:
Investors Fund Manager
• Trade Capture
• Reconciliation
• Valuations & pricing
• Performance Fee Sch.
Trade Instructions • Investor / SH Services
Executing
• Audit & Tax compliance
Broker • Risk Management Support
Prime Broker: • Registrar & TA Services

• Clears & Settles Trades

• Securities Lending
• Communicates Corp Actions
• Reporting & Compliance
• Portfolio Valuation

Trade Reports
Details
Thank You