The rules governing marketing activities for hedge funds were changed by the Jumpstart Our Business Startups Act of 2012 (JOBS Act). (Related Can you invest in hedge funds?) As a result of these changes, hedge fund managers have greater flexibility in marketing their hedge fund to potential investors. In the United States, hedge funds can be legally marketed to investors who meet certain standards of sophistication. In addition, hedge funds can be marketed to the general public provided that all buyers are accredited investors and that certain other conditions are met. In the SEC`s view, an issuer participating in the same offer cannot invoke both Rule 506(b) and Rule 506(c), except in the case of a limited transitional provision. In today`s more regulated hedge fund environment, representatives of the new hedge fund company will likely want to fill out a variety of documents to proceed with the creation and registration in the United States. Securities and Exchange Commission (SEC) and register with the regulatory authorities of the founding state. The level of documentation and regulatory compliance depends on the type of hedge fund strategy the company plans to use. The articles of association of the hedge fund company should include at least one mission statement, a compliance manual, a code of ethical conduct, a manual of supervisory procedures and an agreement on the management of advisor portfolios. The term hedge fund refers to any type of private investment company that operates under certain exceptions to the registration requirements of the Securities Act of 1933 and the Investment Company Act of 1940. (Ironically, hedge funds may use investment strategies that have nothing to do with hedging.) Given these exceptions, it is much easier to start a hedge fund company than a company that manages more regulated investment options such as mutual funds. The easing of restrictions on hedge funds has helped strengthen the growth of the hedge fund industry.
Management Fees: In addition to a performance-based allocation, virtually all funds charge an asset-based management fee (often 1-2% of the fund`s net asset value) to cover the general partner`s current expenses for managing the fund, such as rent, salaries and computer equipment. Rule 230(m) provides a safe haven for SEC registration to any advisor who exclusively advises private funds and has less than $150 million in assets under management. As we will see below, a private fund is a fund that falls under the provisions of section 3(c)(1) or 3(c)(7) of the Companies Act. Advisors with assets under management between $25 million and $150 million are referred to as exempt reporting advisors. To determine suitability, an exempt reporting advisor must annually aggregate the value of its “regulatory assets under management.” These managed regulatory assets include portfolios of securities through which the advisor provides ongoing and regular monitoring or administration services. The value of assets should be calculated on a gross basis so that the use of leverage by managers of one or more funds should include assets purchased on margin in their calculation. Despite the exemption from registration, exempt reporting consultants are still subject to certain reporting obligations under a subset of the ADV form and may be required to register in the states in which they are located. However, the partnership structure has some advantages. For example, taxation is extremely low.
This is because income is taxed only once. Partnership is a fluid structure. This means that income is not taxed at the partnership level. Instead, it simply trickles down to the investor`s individual income, where it is taxed at the respective rate. The highest possible tax rate of such a tax would be almost 35%, that is, much lower than the company`s rate. This offering will identify the company`s key partners, as well as the fund`s key investors and investment strategy and approach. Investors have an option. If they can invest directly in the offshore fund, they will be asked to do so, and U.S. tax rules do not apply. On the other hand, if they invest in the portfolio fund registered in the United States, they must pay their fair share to the Internal Revenue Service! The master mini-structure was created as a result of the Economic Stabilization Act of 2008. Instead of three typical entities of the main power structure, in this case we have two funds, usually an offshore charger and a national master fund. The offshore feeder is taxed as a company to avoid UBTI for tax-exempt US investors.
If the master fund is structured as a partnership, the manager would receive its performance commissions in the form of an income allowance that would retain the same character as at the fund level. Therefore, the manager could benefit from all long-term capital gains created by the master fund. Offshore funds are often structured as a company, a unit similar to a U.S. company that issues shares. The management company is often not an investor in the fund and an investment management contract is necessary to control the relationship between the fund and the management company. To create a hedge fund in the United States, it is usually necessary to establish two business units. The first entity is created for the hedge fund itself and the second entity for the hedge fund`s investment manager. The hedge fund is usually formed as a limited partnership (LP) or limited liability company (LLC). In comparison, a general investment manager can set up any type of business structure that meets the needs of the investment manager. In most cases, hedge funds are incorporated as limited partnerships, where the investment advisor acts as a lead partner and a registered group of investors acts as a secondary partner. Investor Level and Qualifications: The fund can be offered to an unlimited number of “accredited investors” and up to 35 other purchases. While non-qualified investors have the right to purchase fund units, which is generally not the case for a variety of reasons, they should still be considered sophisticated investors, alone or with a representative of the buyer, so that they have sufficient financial and business knowledge and experience to assess the merits and risks of the potential investment.
The term “qualified investor” is currently defined as: Organization fees: While the manager must bear the legal and other costs of setting up the fund, most managers choose to structure the fund`s documents in such a way that these organizational costs are reimbursed to the manager over a period of one to five years. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, hedge fund managers are subject to registration and reporting requirements. However, if the manager has less than $25 million in assets under management, it is not eligible for SEC registration and must apply to the laws of the advisor`s home state to determine registration and licensing requirements. Audit and tax services: Although the preparation of an annual fund audit is not required by law (unless the manager is a registered investment advisor), investors generally consider audit services to be a priority for due diligence. For start-up managers, an audit can be postponed to the end of the fund`s first financial year. Performance Distribution: As noted earlier, the performance-based compensation element of a manager is likely to be the defining feature of the hedge fund structure. It is intended to reward the manager and create incentives to achieve positive returns. Today, the industry standard for performance-based compensation is 20% of all realized or unrealized gains versus realized or unrealized losses. Typically, performance fees are structured as an allocation of income from the fund to the general partner (calculated on an investor`s basis) rather than as a fee for the entire fund.
In general, the incentive allowance is calculated quarterly, semi-annually or annually. Key man: One of the concerns of investors is that even if their investments are blocked, the main employees of hedge funds could leave or become unable to work. To remedy this, funds sometimes insert a key clause that gives investors the opportunity to repay their funds if a key manager suddenly leaves the company or worse, is unable to work for any reason.