Offering Advice & Services to Traders | Investors | Funds
Attracting Investors
Customer Testimonial I wanted to thank you and your staff for the professional and timely services that you provided in setting up a CTA business. As an individual trader for almost 20 years I have a full grasp of markets but had very little knowledge in setting up a trading business for clients. Everyone at your firm was extremely friendlyand helpful in giving me guidance in this new startup. Your prices were fair and while I looked at different firms to handle the process yours was head and shoulders above the rest. Thanks so much, Sxxx Sxxxr Managing Partner Sxxxxx Capital Management LLC. June 18, 2010.
Hedge Fund Startup Tips Hedge Fund Formation Attorneys Only work with hedge fund attorneys (such as Hannah Terhune) whom have formed 100 other hedge funds in the past and have current references and an outstanding reputation (see our Customer Testimonials) to show for it! Avoid attorneys your broker "likes" as they are likely splitting fees or have some other back office arrangement they do not want you to know about. Your lawyer should work for you and not your broker. Hedge Fund Compliance Services Hedge fund "compliance" refers to mandatory blue sky filings such as SEC Form D, Form U-2, etc. A good place to start with guidance is your experienced hedge fund formation attorney because she will have the inside scoop as to who is competent in the field and who is not. Most likely your hedge fund attorney offers these services as well. Lawyers customarily provide these services and do so with extreme competence. Stay away from "shops" that just fill the forms out without any understanding of what representations are being made to the state and federal regulators. Again, avoid broker referrals. Also, don't listen to brokers who tell you that no filings are required. They are either ignorant or unethical.
Prime Brokerage Firms You don't need "prime." In today's market for brokerage services, any leading retail brokerage firm works well for start up funds. Prime brokers will promise you the world (remember, they are professional salesmen) and claim they can help boost the credibility of your fund and raise capital. Don't believe it for a minute unless you have an amazing background and a documented trading history (read: successful). Most of the brokers offering "capital introduction" services just want you to buy their pitch book and web site package; they don't really expect your fund to succeed. Hedge Fund Incubators Use an incubator structure to launch your hedge fund. It is extremely beneficial to use one of these platforms when starting your hedge fund business.
Raise Capital and Avoid Illegal Offers of Your Hedge Fund What good is the best performance record around if few people know about it? Marketing and promotion are vital for a private fund to succeed. However, unlike other businesses significant restrictions exist for private funds. Only registered, listed funds (e.g., mutual funds) may market themselves to the general public. Non-registered, private funds must market themselves and their performance records in a discreet, nonpublic manner. Private Funds Private offerings (funds) in virtually all countries are exempt from registration requirements. In nearly all countries exempt funds are subject to limits on the manner of offering; the number and types of purchasers and offerees; the resale of the purchased securities; and in many cases the amount of money raised during a specific time period.
What Creates Illegal Offers? Marketing to the general public is not allowed for private funds. The general public is everyone in the world except people and institutions with which you have established a pre-existing relationship. Promoting a private fund in a public chat room or other public forum is a public communication and illegal in most countries.
Internet Marketing Quantitative traders aside, fund managers and their investment advisers may well be the most technologically competent players in the fund industry. Once a private fund is established the question arises about use of the Internet to attract investors. Marketing your fund through a website is viewed as an offer to the general public if anyone can access the message. It is possible to avoid an illegal offer when your fund has a secure website allowing password protected access to clients or pre-qualified prospects.
Internet Offers Many countries do not treat information presented on a website as an offer unless it contains both detailed information and a means to subscribe (e.g. a subscription agreement). Other countries treat less detailed information as an offer but do not consider the offer to be made unless the information on the website is targeted at their residents. There are some countries that consider it an offer simply if any information is viewable by their residents. Countries in the latter group are not likely to target the issuer for enforcement activity unless there is evidence that the offer is targeted at their residents in some way. Countries concerned with Internet offerings and enforcement also show interest in the elements of push-pull marketing and volition. If a viewer "pulls" the information from the Internet, the information may not constitute an offer. If the information were "pushed" at the viewer (e.g., through e-mail) the information would treated as an offer.
U.S. Private Funds In the United States, use of the Internet raises tough issues for funds. Absent special safeguards, the SEC views information about a fund spread over the Internet as general advertising and solicitation, which is problematic from a legal standpoint as the Securities Act of 1933 prohibits any form of general solicitation or general advertising on behalf of a private fund. When selling a private fund through the Internet, good planning is needed to avoid legal headaches. Under very limited circumstances the SEC permits a password protected website to provide information about a fund. At a minimum, fund web sites need to ensure fund information is available only to pre-qualified accredited investors and is password protected. Self-certification by potential investors of their status as an accredited investor is not allowed; rather, fund managers must evaluate and screen prospects through questionnaires and in-depth phone calls. The private fund's name cannot be disclosed except in materials that can be accessed only by pre-qualified accredited investors through a password. Finally, pre-qualified accredited investors should not be allowed to invest in the fund until 30 days has passed since they were qualified.
Private Investment Advisers The Investment Advisers Act of 1940 exempts from registration any investment adviser who during the course of the preceding 12 months has had fewer than 15 clients and who does not holds himself out generally to the public as an investment adviser. The SEC interprets "holding out" broadly. The private adviser cannot use business cards or let it be known generally by word of mouth or otherwise that he is available to provide investment advice or accept new clients.
Hedge Fund Databases There are many websites today that allow accredited investors to scan, monitor and contact the managers of the funds listed. These sites and services have proven to be an effective way for fund managers to obtain investors and prospects. The SEC has advised that a private investment adviser posting information about a private fund on a restricted access web site is not holding itself out generally to the public. Procedures must be in place to limit access to web site information to accredited investors. Private fund managers can post information related to a private fund but cannot offer other services or products on the site. Internet use to provide information about an adviser's services would be holding out.
Procedures for Internet Offering SEC guidance indicates the following criteria are necessary to ensure the mere posting of information on a website is not a public advertisement: the website is run by a broker registered with the FINRA or affiliated with such a registered broker; the website requires a password to gain access; requires the broker to have a pre-existing, substantive relationship with the prospective investor; and the website requires the person signing up for access to the service be qualified as an accredited investor.
Create a Paper Trail Use questionnaires to establish or determine preexisting relationship, accredited investor status, sophistication, business experience, and/or prior investment with issuer. Questionnaires are helpful in terms of proving general marketing did not take place. SEC guidance indicates that a pre-existing, substantive relationship with the prospective investor can be established through a purchaser questionnaire providing sufficient information to evaluate the offeree's sophistication as an investor and financial situation. You must maintain adequate records of the number and names of the persons contacted in connection with your offering and of the nature and extent of your relationships with them. The goal here is to be ready to demonstrate that a solicitation was controlled, private, and not indiscriminate.
Selling Agreements Fund marketing has evolved into an industry of its own. Registered brokers are entitled to distribute private fund information to their own customers even though the fund itself has no pre-existing relationship with the broker's customers. Different rules apply to brokers and for that reason many funds attempt to raise capital with their assistance. Brokers enter into selling agreements with fund managers to find investors for their funds as well as assist with strategy and market positioning. Brokers can identify prospective investors, arrange meetings to pre-qualify prospective investors in terms of overall suitability, accompany managers to investor presentations, prepare marketing materials, follow up with prospective investors, and act as client liaison throughout the investment period. For these services a broker may demand 20% of all fees. The SEC takes the position that the relationship between an intermediary (e.g., broker/dealer, lawyer, or accountant) and the intermediary's client can take the place of the issuer/investor relationship. If you are considering whether to sign a selling agreement, there are a variety of issues to consider. The most important issue for sales in the U.S. market is whether the placement agent is licensed as a broker with the SEC and in the various states in which it intends to solicit investors. The placement agent will be selling securities (your fund) and getting paid and needs to have a license. The reason you can sell interests in your own fund without a sales license to investors is because you are covered by issuer exemption. Note that your staff cannot receive separate compensation for their sales efforts under the issuer exemption.
Obtain Certifications If you use a broker to market and distribute your fund, you should obtain investors certifications to make sure that they qualify for investment in your fund and that statements in the subscription agreement are in fact accurate. Restrict Delivery of Offering Documents Procedures such as those outlined by the SEC should be established to limit delivery of the memorandum to persons who are qualified to invest in your fund. Either one person or a limited number of persons should control access to your fund's offering documents and keep records as to who has received a copy of the offering documents. Release of the offering documents should require the approval of some person or persons who has made a solid inquiry as to the prospective offeree. The Bottom Line While in some ways it is good that no specific criteria exist as to what constitutes marketing to the general public and an illegal offer, fund promoters must make sure their marketing activities do not rise to the level of a public offer. In just about any country, the best way to raise capital for your fund is to build on existing relationships. Use direct personal contact to identify prospective purchasers or to establish preexisting business relationships in the legal sense. A preexisting relationship is not an absolute requirement especially in situations where only a very small number of persons will be solicited. In larger offerings, however, if there is a preexisting relationship it is less likely that the larger numbers of offerees will result in unlawful public solicitation and illegal offer. The preexisting relationship can exist with either the issuer or its professional intermediary. We provide the following services to our clients on an ongoing basis: •Prepare investor correspondence on behalf of hedge funds •Provide updates on events, new laws and regulations that impact hedge fund formation and operations •Advise regarding SEC, CFTC and tax matters affecting hedge funds •Advise regarding hedge fund investor qualifications •Ensure compliance for hedge funds with state blue sky laws We can advise you on the following issues: •Marketing a hedge fund, including marketing on the internet, without violating the prohibition on general solicitation and advertising •Compensating third party marketers and brokers who assist in raising capital for a hedge fund •Using soft dollars to pay for services utilized by a hedge fund •Compiling a track based on past performance of managed accounts that is AIMR and SEC compliant •Operating a hedge fund that is affiliated with a broker/dealer •Publishing an investment newsletter and operating a hedge fund
Fiduciaries, investors and counterparties (e.g., prime brokers, fund administrators, and auditors) have a duty to perform due diligence to ensure a fund's investment decisions are sound and compatible with their client's risk profiles. Due diligence research at a minimum should include a due diligence questionnaire (submitted to fund's manager) requesting extensive information covering every major aspect of the fund's organization, operation and management. Due diligence checks should also include an face-to-face meeting with a fund's manager (and other key people).
Typical areas of investigation include: Volatility (examines whether the fund's annual return was earned evenly over the year or by clustered gains); Breath (examines whether fund was profitable on the average or based on a few trades; examines concentration of exposures and any exposure limits, e.g., a possible limit might be no more than five percent (5%) in any particular holding and no more than ten percent (10%) in any particular industry); Repetition (examines whether the fund's strategy is capable of being repeated); Risk Controls (examines whether the fund hedges against currency, risks interest rate exposure and whether contingency and business continuity plans are in place should its key trader die); Leverage (examines the use of leverage and whether it is limited); Fund Reporting (examines custody of fund money; prime brokerage arrangements); Administration (examines whether a third party is used to calculate monthly returns; frequency and detail of information given to investors; copies of the fund's recent correspondence to investors, e.g., quarterly letters); Fees (examines compensation and incentive arrangements); and Auditor (examines whether the fund uses a third party auditor; examines the quality of the fund's audited and unaudited financial statements, e.g., balance sheet, etc.; and examines methods used to value portfolio holdings, including illiquid holdings).
Fund managers should be prepared for an in-depth "audit" when it comes to attracting new investors. Prospective investors ("prospects") may request information beyond that provided in the fund's offering documents. When dealing with prospects, it is helpful for fund managers to be familiar with the due diligence process. To minimize disclosure problems, fund managers should be aware of the kind of questions and concerns prospects are likely to raise.
Organizational Documents What is the fund's mailing address? Physical address? If there are multiple addresses for the fund or if the fund shares an address or office space with another fund or another business or company, require an explanation and obtain document (written contract) that enables sharing or collocation. Is the fund registered with the SEC? The state? Request a copy of Form D, as filed with SEC and relevant states. Verify the Form D or state regulatory equivalent filings in all states. In what state is the fund organized? Most domestic funds are organized in Delaware, although some are organized in Nevada, and, occasionally, in another state. What is the form of organization? Domestic funds are typically organized either as a limited partnership (in which the manager is the general partner and the investors are limited partners) or as a limited liability company in which the manager is the managing member and the investors are non-managing members). Obtain fund formation documents (e.g., Articles of Organization or Articles of Association). Request State Certificate of Good Standing from fund. This can be obtained from the state of formation. Contact state to verify certificate status or request the certificate be mailed directly to you.
Is the fund domestic or offshore? If offshore, determine whether manager and/or fund are regulated by any regulator, and, if so, obtain regulatory filings. Ask about prime broker or other custodian, and administrator. Are they reputable? Where are the funds and securities kept? If the answer is not New York, London, or some other major financial center, this is a warning sign. Inquire about the lawyers and the accountants: there is a limited universe of professionals in each offshore jurisdiction, and use of professionals who are not well-known raises concerns. What is the management fee? What is the performance fee? Does the manager have the right to more than 20% of the profits? If so, think twice about investing. Does the manager's right to profits require that it first exceed a stated return to the investors (termed a hurdle rate)? If not, think twice about investing. Does the agreement have a "high water mark?" If not, it is probably inadvisable to invest, since this indicates unfairness on the part of the manager. Is it a fund of funds? If the fund is a fund of funds, there are special considerations. The most important of which concerns fees and compensation to the two levels of managers. Obtain Investment Advisory Agreement between the fund and the investment adviser. Verify that it conforms to stated relationship in the fund's Offering Memorandum. What are the Withdrawal Terms? Does the agreement permit an investor to withdraw all or part of its capital? If so, on what conditions must the investor give written notice (such as 90 days or 180 days) and how often in each year can an investor withdraw? Industry standards vary. In some cases, withdrawal four times a year is permitted, in other cases, only on December 31, after giving notice 90 days in advance. If the agreement contains very restrictive withdrawal rights, think twice about investing. Does the fund have an Engagement Letter with an attorney on file? Obtain a copy and contact attorney to verify the client relationship. Does the fund have an Engagement Letter with an auditor on file? Obtain a copy and verify the client relationship. Financial Statements Obtain copies of the last three years audited financial statements directly from the auditor. Do not accept copies provided by fund. Review them to see whether they agree with what the manager has represented to be the fund's results. Obtain copies of filed tax returns for last two years directly from the fund's accounting firm. Do not accept copies provided by the fund. Tax returns should include schedules and statements (except Schedule K-1, which discloses each investor's position in the fund). Compare results to audited financials, and reconcile tax results with financials (through unrealized gain/loss). Determine whether for tax purposes the fund is treated as a trader in securities (favorable treatment) or as an investor (unfavorable treatment). If the fund is a fund of funds, does the manager issue its financials and timely tax returns or are there extensions? What are the strategies employed by each of the sub-managers in the investee funds, and are they sufficiently diversified to spread risk? Obtain Performance Reports for the past 5 years. If PPM gives statistical history, review this and compare to audited financials. If manager supplies historical results, ask if these results are presented in compliance with AIMR (industry association) guidelines for presentation of results. Does the fund report far superior results to other funds in its investment strategy group? If so, ask for an explanation since there have been a number of frauds involving purportedly excellent results that ran counter to prevailing trends. Offering Memorandum Review the fund's Offering Memorandum. If there is a Form ADV (there will be if the manager is a registered investment advisers), compare the Form ADV to the PPM and to the one on the FINRA website. What is the fund's brokerage firm(s)? Who are the prime brokers or other custodians for the fund? It is common for a hedge fund to have one or more prime brokers, who track the investments and custody the funds. Use of a prime broker is a positive indication. However, if the fund invests in commodities, that part of the investing cannot be done through a prime broker. Also, very large funds ($500 million and up) do not use a prime broker because it is not cost efficient.
Investment Manager Is the investment manager registered as an investment adviser with SEC? If yes, review Form ADV. Review entire form and, in particular, look for number of personnel employed, number of clients, and funds under management. Also look for whether any advisee clients are SEC registered investment companies or nonregistered funds, and whether the adviser has had problems with regulators, has other business activities, etc. Does the investment manager have conflicts of interest with the fund and does the manager have any controls in place to manage those conflicts? Is the investment manager registered with any state regulatory authority as an investment adviser? If so, review forms. If not registered as investment adviser with SEC, or state level, higher level of scrutiny required. Examine investment manager's Articles of Organization and Certificates of Formation, jurisdiction of organization, location of office, and EIN letter from the IRS. Note that it is very rare for the investment manager of an onshore fund to be organized in a foreign jurisdiction. Examine the Operating Agreement of the investment manager. What licenses do individuals employed at the investment manager possess? Many management personnel possess a securities license, such as Series 7 (registered representative of a broker-dealer) because the manager is itself registered with the SEC as a broker-dealer. If individuals are investment advisers, they will be required to have the Series 65 or equivalent. What are the educational and professional credentials of the personnel? Verify credentials listed. What institutions of higher learning did they attend? Do they have a graduate degree in business or economics; sometimes, engineering, mathematics, medicinet? Are they a CFA (Certified Financial Analyst), which is the standard industry credential for professional investment managers? What are the employment histories of the personnel? Were they employed at other hedge funds? If so, verify employment and review the history of those funds. Were they employed at major financial institutions, and, if so, in what capacity? Examine the investment manager's past performance (if applicable). Obtain photo identification from the manager (driver's license, passport, etc.). Perform background checks on the manager and the principals of the manager. Useful places to look are Dun & Bradstreet report (credit check) and KnowX.com (background check with information on bankruptcies, liens, lawsuits, judgments, and UCC's). Be sure to obtain permission from each individual to run a background check. Check on court decisions against the manager and its principals. Get state and federal filings on the manager. Run check on FACTIVA (Dow Jones news retrieval service) or similar service to obtain media articles about the manager and its principals. Get at least three references from the manager: inquire as to who the references are and conduct due diligence. Trust your gut!
Customer Testimonial I wanted to thank you and your staff for the professional and timely services that you provided in setting up a CTA business. As an individual trader for almost 20 years I have a full grasp of markets but had very little knowledge in setting up a trading business for clients. Everyone at your firm was extremely friendlyand helpful in giving me guidance in this new startup. Your prices were fair and while I looked at different firms to handle the process yours was head and shoulders above the rest. Thanks so much, Sxxx Sxxxr Managing Partner Sxxxxx Capital Management LLC. June 18, 2010.
CapitalManagementServicesGroup.com is recognized by discriminating fund managers and traders as being the foremost tax and legal authority in the business. Attorney Hannah Terhune's education and experience are unsurpassed in the area of hedge funds creation and management platforms, and the complex body of tax laws related thereto. Ms. Terhune's exensive knowledge and experience have made her an indispensable resource for serious fund management and trading professionals. Ms. Terhune's articles on the subjects have appeared in over 100 publications worldwide. Chances are, if you have read about the above matters, Ms. Terhune has written about them. Give us the opportunity to use that knowledge and experience for you. CMSG provides the best services and support needed for hedge fund projects and associated activities in one convenient place, saving you time and energy. No need to coordinate work between different firms; we handle the entire process from start to finish. We offer hedge fund and money management accounting, tax services, tax preparation, consulting, entity and retirement plan formation services. Our professionals provide the highest quality services at competitive rates. But don't take our word for it, give us a call and let us prove what we can do for you. Read our Customer Testimonials and learn more About Us.
Personal Consultations and Fees You get answers to your specific questions by speaking directly to Hannah Terhune, an experienced hedge fund attorney. Ms. Terhune's hard-earned knowledge and experience can be put to work to save you unnecessary steps and costly wasted effort. The consult is an invaluable opportunity to speak to Hannah one-on-one, and learn how to achieve more in less time. As a result, you can anticipate that the return on your investment will far outweigh the costs associated with our unsurpassed services. Of course, fees are a necessary part of the consultation. Ms. Terhune's credentials reflect an invaluable resource that combines a well-informed professional practitioner with sound ethical judgment that cannot be over-estimated. The expertise required to recommend best solutions and provide sound advice should never be taken lightly. We are confident that when you are finished with your consultation, you will be impressed and more informed about your business plans than ever before. Call (307) 213-4732 or Click Here to Request Services.
Our Commitment Henry David Thoreau wrote: "Do not hire a man who works for money, but him who does it for love of it." We are committed to your business plans and bringing you the best possible options. We are an established and internationally recognized business that serves and educates our clients throughout the industry. We do this by striving for the best results. Above all, we are a law firm. A lawyer is a philosopher and role model. The ability to improve our clients' lives is a privilege that we do not take lightly. There is tremendous power in being able to effect a positive change in our clients' lives. Our aim is to welcome our clients and to provide a comfortable, warm environment for all. We believe that making our clients feel comfortable and confident with the process provides the basis for a constructive relationship built on mutual trust. time. Thanks for visiting our website. We hope to have the opportunity to serve you.
