Costs The cost to form an incubator fund is lower than the cost to form a full-fledged hedge fund. The incubator fund can be upgraded to fully operational fund at any time. Since an incubator fund formation involves the same work needed to form a fully operational hedge fund, you will save money when (and if) you convert your incubator fund to a full-fledged fund. There are no cost redundancies. Contact Us for Incubator Fund Prices
Incubator Fund Administration You do not outside accounting or administrative services to start and run an incubator fund. Postponing the need to hire a fund administrator is another reason to establish an incubator fund first. When you have outside investors, then consider outside fund administration. Fund administrators support full-fledged hedge funds by providing net asset value calculations, monthly reports, performance tear sheets and performance and management fee calculations. Learn More About Hedge Fund Administration, Taxes and Audit
USA Incubator Fund Structure An incubator fund is a structure comprised of a Delaware limited partnership as the fund entity and an LLC as the management company entity -- usually in your home state or another country. If the fund anticipates many investment strategies, a Delaware Series LLC or Delaware Series Limited Partnership can be used. If you are not certain about your plans to stay in your home state, we suggest setting up the management company in a neutral state (like Delaware or Florida) or country (like the British Virgin Islands). Investors become limited partners of the fund and all the trading activity of the fund takes place within the fund entity. The same entities will be used in the fully-operational version of your hedge fund in the future. See See World's Favorite New Tax Haven Is the United States and Learn More About the Benefits of Delaware Companies
Complex Incubator Fund Structures In some cases we suggest stacking a Delaware LLC over a Florida LLC for regulatory and tax purposes. If you live in a high tax state or country you may consider setting up three companies: the hedge fund, the investment management company (i.e., the company where discretionary trading authority and decisions take place) to receive the carried interest share in the future (i.e., the performance allocation) and a management company to receive the management fee in the future (i.e., the company where management of the fund's books and records takes place). We can help you forward plan in to complex structures for tax and regulatory purposes. Contact Hedge Fund Attorney Hannah Terhune for a Free Consult
How are Incubator Hedge Funds Taxed? The U.S. incubator fund is taxed as a pass-through entity. This means that the incubator fund's realized gains and losses are taxed at the investor level. The tax character (i.e., ordinary income or capital gain treatment) of the gains and losses pass through to the investor (i.e.,reported on IRS Form K-1). Learn More About Hedge Fund Taxation Offshore incubator funds are set up as corporations, generally, and with respect to U.S. investors, can work as UBTI blockers. Learn More About Offshore Incubator Funds
How much money do I need to seed the incubator fund? There is no minimum investment amount. You are just trying to create a performance percentage based on real time trading. See a Sample Performance Report & Tear Sheet
Hedge Fund Banking and Brokerage Services For either banking or brokerage services, you cannot use your personal account as the hedge fund’s account. The hedge fund needs its own bank and brokerage account.
Why can't I use my own personal performance instead of forming an incubator fund?Over the years the SEC has issued rules for performance advertising through a series of enforcement actions, "no-action" letters and interpretive letters. The SEC rules are very difficult to follow. First of all, if you are not a registered investment adviser, you have no business advertising your services as such. You are in the position of someone driving a car without a driver's license. You should not be soliciting clients, holding your advisory services out to anyone or marketing your prior performance results. Investment adviser advertising, including performance advertising, is governed by Rule 206 of the Investment Advisers Act of 1940 (SEC Advertising Rule). The law applies to those exempt from (or not eligible for) SEC registration. If you are not eligible for SEC registration, you are subject to state investment adviser law. None of the states allow you to advertise your services (i.e., hold them out to others) without state registration as an investment adviser. Learn More About SEC Registration An ad is a written or oral communication addressed to more than one person which offers investment advisor services. It is something communicated to attract or maintain clients. The SEC gives a broad brush to the concept of an ad. It also gives a broad reading to what it considers false, misleading or untrue. This means that if every single sentence of your ad is true but the over-all effect is deceptive and misleading, the SEC views it as fraudulent. Learn More About Hedge Fund Marketing The sniff test for fraud is so subjective that the SEC won't give advice as to whether an ad is misleading. Contact Us for Assistance
Can I gather indications of interest from potential investors during the incubation phase? Yes. Performance information about the incubator hedge fund can be provided to preexisting and potential contacts at any point after the fund's inception. You can gather indications of interest through your personal network, friends and family (i.e., persons with whom you have a pre-existing relationship). Learn More About Attracting Investors
Can I operate more than one incubator fund? Yes. Some managers will incubate multiple funds in order to develop track records for different strategies.
Can I add or withdraw money from my incubator fund? Yes. The track record of the fund is measured as the percentage return of assets under management, regardless of the amount of capital contributed to or withdrawn from the fund. Learn More About Hedge Fund Performance Reports
Funding the Incubator Fund With very few exceptions, the incubator fund should not accept outside investors. Even investment from close friends and family can run afoul of state and federal securities law, especially if they are non-accredited investors. You should not borrow capital from others to invest in the incubator fund. The regulators look through this arrangement. You should consult with us prior to accepting any outside funds from any source.
Capital Management Service Group, Inc. We use a client-based approach to our fund structuring and analysis. Our clients routinely comment on the excellence of our personal service and the time we take to properly understand and implement the client’s unique circumstances and objectives. Call Us at +1 (307) 213-4732, Email Us and Read What Our Client Say About Us on LinkedIn on your own.
What types of incubator hedge funds are available? There are many different types of incubator hedge funds. An incubator hedge fund can be started for any specific trading strategy. It should mirror the investment program to be used in the future to trade customer money. We advise on all investment strategies and assets classes.
Spot Forex, Commodities and Managed Futures Funds Incubator hedge fund trading spot forex, managed futures and commodities can operate under NFA Rule 4.13(a)(1). We offer NFA registration services and a filing service for NFA exemptions. Learn More About NFA Registration
Should I Make a Mark-to-Market Election? Only someone who qualifies as an active securities trader can elect MTM treatment. Although the MTM election can be made in a year in which you qualify as an active trader, the MTM election once made applies to subsequent years whether or not you are an active trader in later years. In this case, the fund has to qualify by its level of trading activity to be able to make the mark-to-market election. Learn More About Mark-to-Market Election
Can I open a trading account for my incubator fund at any brokerage firm? Yes. As soon as the hedge fund is formed you can open a brokerage account and begin trading.
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Capital Management Services Group, Inc. is recognized by discriminating persons as being one of the foremost legal authorities in the hedge fund industry. Attorney Hannah Terhune's extensive international tax and hedge fund knowledge and experience make her an indispensable resource for those starting a hedge fund or an investment management business. Ms. Terhune's numerous articles on hedge funds and international tax matters have appeared in publications worldwide. Read Our Leading Media Content and Articles by Hannah Terhune on Hedge Funds and International Tax Planning, Chances are, if you have read anything related to starting a hedge fund, Ms. Terhune wrote it. Read Our Client Comments and Read About Hannah Terhune on LinkedIn. When you engage us you get a unique combination of securities, tax, and business experience. We think we have the best set of hedge fund offering documents in the industry. We aim to deliver quick turnaround times because we understand that our Clients want to begin operations as soon as possible. Give us the opportunity to use our knowledge and experience for you. No client is too large or too small for us. We pride ourselves in providing personal attention to each Client. We provide high 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.
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