How do you start a Hedge Fund?
So, what is a Hedge Fund, and how do I start one?
A hedge fund is an investment fund usually limited to accredited investors. The difference between a Hedge Fund and a traditional Broker - client relationship, is that the money that is invested in the fund is pooled together which allows the manager to take on larger and perhaps riskier positions. Hedge Funds seek to balance their portfolio by utilizing different trading strategies; such has long or short positions, option trading and utilizing margin.
There are a number of different structures for Hedge Funds: the traditional domestic fund, feeder fund, master feeder fund and parallel structure.
A United States Domestic Hedge Fund is normally set up as a Partnership. The investors are Limited Partners and the Fund Manager is the General Partner. To facilitate this structure you need to form two entities. Generally the Fund Manager will form a Limited Liability Company as the Management Company. The LLC will serve as the General Partner and will appoint the Fund Manager. The LLC will also receive the Management Fee. The management fee is intended to compensate the Fund Manager for their time and expertise and can be structured in a number of ways. You may hear people refer to "2 and 20", this refers to a 2% management fee, which can be paid monthly, quarterly or yearly, and a 20% end of year percentage of profits. The 2% management fee is used to pay the expenses of operating the fund; the 20% is an incentive bonus.
The Limited Liability Company which operates as the General Manager generally details the powers and structure of the General Manager. The General Manager should have the exclusive right to make all investment decisions on behalf of the Partnership.
The Limited Partnership is made up of the investors and generally details the rights and obligations of the partners. It details what the minimum investment is, how long that investment will be locked up, the ever important indemnity clause, and how and when the investor may make a withdrawal.
The Offering Memorandum, details the trading strategy, the rights and obligations of both the investor and fund manager, and includes the subscription agreement which asks questions about the investor's financial stability. You may have unaccredited investors in Hedge Funds, but I don't recommend it because I believe it could increase your liability and dilute the protection you created with your indemnity clause.
How do you start a Hedge Fund .... by contacting Scott Goldring Associates at 646-652-8567.
Categories: Hedge Fund Formation
Tags: Basics of Hedge Fund Formation
That was inspiring,
Great explanation of what a hedgefund is,
Anyway, thanks for the post
Reply to this
Being an investor is all about taking risks. Hedge funds can be very difficult to understand and are not always the best choice for everyone. I like how you explained it here.
Reply to this
Dear questioner, if you don't know what a hedge fund is, it may not be wise to start one. I'm a believer that you have to understand every option fully before you act on some financial decision.
Reply to this
To fully understand how a hedge fund operates, one should do research and read article such as this one. If you are not a sophisticated investor or accredited investor you should consult with your financial advisor prior to making any investment. There are many financial advisors who may want or need some additional information as to the general structure of a fund as an investment vehicle. If everyone followed the mantra that if you don't currently know something you shouldn't ask questions there would be no innovation or great inventions. One may understand trading and finance but not necessarily understand how a fund is structured, which is why we endeavored to explain it in this article.
Reply to this