How to set up a Hedge Fund

The structure of a typical hedge fund has a company either liability, limited partnership or S corporation that would manage the accounts. A hedge fund has the management company as the partner, and limited partners, who are the investors.  The structure allows limited legal and tax liabilities for the investors and managers. Anyone who receives equity will have a stake in the management company which will, in turn, have a state in the hedge fund. This can be employees or the owners of the business.

To sell ownership interests, the fund managers need to register the offering with the Securities and Exchange Commission which would place an undue compliance burden on them. However, they can get an exemption from having to meet certain qualifications including:-

  • No public offering, including advertising interviews internet websites among others, of securities.
  • The fund has to limit the number of investors
  • Within 15 days of the initial sale of securities, the company must file form D with the SEC. due to the legal complexities of the forms, hedge fund managers recommend that you get legal representation from a lawyer who has expertise in the field of hedge funds.

Fees

Two percent of the assets from the funds go to the management company to cover running expenses, while 20% paid as an incentive. However, some feel that the 2% is a bit high as a managing fee and pay less than that. It generally does not fall below 1.5%.  This fee may be enough to cover running expenses especially in the early stages of setting up a hedge fund, and this means that if you want to get into the hedge fund business you may have to look for capital to help you manage some of the costs.  New hedge fund managers may, therefore, opt for a salary or approach investors to give them some seed money. The 20% incentive allows the hedge fund manager to increase the ownership in the fund,  this structure allows them to avoid the money being taxed as income, and is therefore considered capital gain when they redeem it.

Hedge fund managers have a wide range of assets to invest in including bonds, options, shares, and features. They also use a wide range of strategies to ensure you get your return on money. They largely depend on how the market is doing so it is not always possible for them to predict how your returns will be.

Some of the strategies used in investing include the use of derivatives like swaps, warrants, and options. They also use gearing which means investing a small deposit to make a large investment. They can also short sell where they sell what you do not currently own in the hope that you can buy it a cheaper price at a later date.

It is important that you get a good hedge fund manager who can make good decisions with regard to how to invest your money.  If you want to get into the business of hedge fund management, then you need to get a thorough understanding of the field before you take on any clients.…

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