Offering Advice & Services to Traders | Investors | Funds
Commodity Pools and Managed Futures Funds
Customer Testimonial I would like to state unequivocally that I have had a completely positive experience in dealing with Capital Management Services Group. Truly, from the first phone call that I made to Capital Management, to the conference call that was arranged with Hannah Terhune, the time she took in answering all of my questions, and, finally, to the follow-up by Amy Hong. My case involved the establishment of a Forex Incubator Fund, and was thoroughly handled. Hannah Terhune responded promptly to my subsequent phone calls and Amy Hong is absolutely 100% efficient. I, certainly, plan to enlist Capital Management's services for my legal needs in the future concerning fund management. I would rate my experience and results 5 out of 5 stars! Totally satisfied, Rxxxxxx Sxxxx, Sept.22, 2010
What is a Commodity Pool? A commodity pool is the commodity-futures equivalent of a mutual fund; the investor buys shares in the pool and the operator of the pool invests the proceeds in commodity futures. Since commodity pools, are generally not “covered securities” (unless privately placed in accordance with Rule 506 of SEC Regulation D under the Securities Act of 1933) they are not affected by NSMIA and remain subject to full “merit review” where applicable. Most commodity pools are "covered securities" and subject to standard hedge fund rules. Moreover, many states have adopted the Commodity Pool Guidelines by rule or as a matter of policy. Of course, in practice, not all of the foregoing states actually apply all or any part of the Commodity Pool Guidelines in reviewing filings, while other states not listed may apply them from time to time, notwithstanding the lack of formal rulemaking or prior notice.
A modest level of managed futures trading can result regulatory. The good news is that regulations exempt CPOs operating qualifying pools from registration. If you can’t take advantage of an exemption from registration (see below) under regulations issued by the Commodity Futures Trading Commission (CFTC), you must register with the CFTC, join the National Futures Association (NFA) and absent CFTC regulatory relief, comply with detailed disclosure, recordkeeping and reporting regulations. Managed Futures Funds and Commodity Pool Operators (CPOs) The NFA is a self-regulatory organization to which the CFTC has delegated certain registration functions, including the registration of CPOs. In the case of manged futures funds ("commodity pools), the operator of the fund and the fund are subject to NFA regulation. A CPO that sets up an exempt fund see below) is exempt from NFA registration, does not have to take the Series 3 exam or join the NFA. A CPO may also have to comply with provisions of the Model State Commodity Code, or other comparable law within a particular state. What is the difference between a CPO and a CTA? A CTA manages individual accounts, while a CPO manages a fund. What is the typical legal structure? In the United States, one can use a limited partnership (or LLC) as the fund and an S corporation (or LLC) as the fund's CPO. For an offshore fund, both the fund and its advisor are set up as a corporation. How Do I Become a CPO? To become a CPO, you must pass the Series 3 Exam (National Commodity Futures Examination). No sponsor is needed for the exam, and those taking the exam generally follow a program of self-study. You must file a Form 7-R for the Pool and a Form 8-R for each principal and associated person of the CPO. Each application requires the payment of a registration fee and an annual fee. Processing an application can require about 2 or 3 months, although applications can be processed in significantly shorter periods.
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.
Can I Avoid NFA Registration? Yes, the CFTC provides for key exemptions from the Commodity Pool Operator (CPO) registration requirements if all Pool investors meet a certain sophistication level. A CPO that sets up an exempt Pool and is exempt from NFA registration does not have to take the Series 3 exam or become a member of the NFA. On January 26, 2011,the CFTC proposed to eliminate two key exemptions from CPO registration. The CFTC proposal would eliminate CFTC Reg. 4.13(a)(3) which currently exempts CPOs from registration if the pool is engaged in a de minimus amount of commodity trading. The proposal would also eliminate CFTC Reg. 4.13(a)(4), which exempts CPOs from registration where the investors are qualified eligible persons (generally natural persons that meet the qualified purchaser standard) and entities that are qualified eligible persons or accredited investors. The CFTC proposal also eliminates the exemption under CFTC Reg. 4.14(a)(8)(i)(D), exempting advisers from registration as CTAs if they provide commodity trading advice solely to CPOs that are exempt from registration under CFTC Reg. 4.13(a)(3) or CFTC Reg. 4.13(a)(4). If the proposal is approved,CPOs and CTAs previously exempt from registration in reliance on these exemptions must register with the CFTC and become members of the National Futures Association. New Exemption
Exempt Commodity Pools If you set up an exempt commodity pool, you don't have to take the Series 3 Exam or join the NFA. To use these exemptions you must give investors a copy of the NFA exemption letter, make certain disclosures in your offering documents and keep certain records. The exemptions are not self-executing. Closely Held Pool Exemption CFTC Reg. 4.13(a)(1) The Single Pool Exemption is available to a CPO who operates only one pool at a time and does not receive any direct or indirect compensation other than reimbursement of expenses. No one involved in the Pool can advertise the Pool or systematically solicit investors. You can set up a pool to develop a track record. You can't receive any direct or indirect compensation other than reimbursement of expenses. You can't advertise the pool or solicit investors. Small Pool Exemption CFTC Reg. 4.13(a)(2) The Small Pool Exemption is available to a CPO receiving capital contributions of less than $400,000 if the Pool doesn't have more than 15 investors. The CPO and its principals and certain relatives of the principals are not counted toward the 15 investor limit. Moreover, their contributions do not count toward the $400,000 limit. There are many exemptions to the $400k and 15 person limit such that the net effect is that you can set up a large pool while relying on this exemption. One of our planning strategies is to set up an exempt pool as a stepping stone to an NFA vetted pool to avoid time delays. De Minimus Pool CFTC Reg. 4.13(a)(3) The Limited Futures Trading Exemption is available to a CPO of a Pool in which futures trading is limited to 5% of the net liquidation value of the Pool or the net notional value of futures and commodity positions does not exceed 100% of the net liquidation value of the Pool. Computing notional value is complex under CFTC Regulation Section 4.13(a) and the Pool must be limited to accredited investors under Regulation D. Qualifying Eligible Persons (QEP Pool) CFTC Reg. 4.13(a)(4) The Qualifying Investors Exemption is available to a CPO of a Pool where each natural person investor is a qualified eligible person or an accredited investor. Interests in the Pool must be exempt from registration under Regulation D and the Securities Act of 1933 and interest must be sold without marketing to the public. How Do I Take Advantage of the Exemptions? To use these exemptions, the CPO must provide to investors at the time it delivers the subscription agreement to investors a copy of the NFA exemption and a statement that it is not required to deliver a DD or a certified annual report (even though most Pools provide these materials to its investors). The CPO relying on these exemptions must keep books and records and make them available for inspection by the CFTC upon request. Registering as an Investment Adviser You do not have to register as an investment adviser if you are not trading securities. Commodities and futures are not securities. If you plan to execute more than an occasional stock trade, however, you may have to register as an investment adviser. Security futures products also constitute securities for purposes of the Investment Company Act of 1940 and CPOs of Pools that trade such products are subject to its constraints.
Customer Testimonial Hannah: You and your team delivered what you promised--on time and on budget. You all were were attentive and professional in every respect, and I appreciate your effort, advice and guidance very much. It was a pleasure working with you, and I would recommend you to others without reservation.Best Regards, PB. January 18, 2010
Hedge Fund Manager Compensation
Charging Fees The Investment Advisers Act of 1940 prohibits a registered fund manager (including a state registered manager) from entering into an advisory contract that provides for a performance fee. Section 205(a)(1) provides that "no investment advisor...shall...enter into, extend or renew any investment advisory contract...if such contract provides for compensation to the Investment Advisor on the basis of a share of capital gains or capital appreciation of the funds or any portion of the funds of the client." The point behind this law is to prevent fund managers from being compensated based on appreciation of the fund's assets.
Management Fees Section 205(b)(1) provides that the prohibition on performance fees shall not be construed to prevent an investment adviser receiving compensation based upon the total value of a fund averaged over a definite period, or as of definite dates, or taken as of a definite date. This provision allows for management fees based on a percentage of assets under management. The management fee is paid whether the fund loses money or makes money. Performance Fees (Incentive/Performance Allocations) Section 205-3 of the Investment Advisers Act allows for performance-based fees (or incentive allocations) to be charged to qualified clients. The point behind this law is to allow sophisticated investors who are capable of evaluating and understanding investment risks to enter into performance based fee contracts. Rule 205-3(d) defines a "qualified client" as 1. A natural person or company that has $750,000 under management of the adviser; or 2. A natural person or company whom the adviser believes (a) has a net worth of $1.5 million or (b) is a qualified purchaser as defined in section 2(a)(51) of the Investment Company Act (ICA). When determining whether a hedge fund is a qualified client the SEC has specific requirements to insure that non-qualified clients do not pool their assets and form a company or hedge fund to become qualified for this exemption. To avoid this, the SEC requires that all equity owners of the company or fund qualify on their own as qualified clients. More detailed rules apply to multiple tiers of hedge funds where again each equity owner of each fund needs to be a qualified client. Rule 205-3(b) thus requires a registered investment adviser intending to charge a hedge fund relying on ICA section 3(c)(1) to look through the hedge fund to ascertain that an investor has at least $750,000 of AUM with the adviser or a net worth of more than $1.5 million when the investment is made (this test applies to individuals and companies).
Customer Testimonial Hannah Terhune and her associates have provided legal advice and services to me for over a year. She provided initial guidance to help determine the kind of fund most suitable for my goals, created the legal documents that are the framework for my hedge-fund, and assisted with ADV submissions to register my company as an Investment Advisor. I continue to rely on her for ongoing compliance issues in this complex and dynamic industry. I found Ms Terhune and her associates to be extremely knowledgeable and helpful in a very responsive way, with friendly and professional manners. Overall a very good experience. Highly recommended. Marty Cawthon ChipChat Technology Group
Drafting Your Performance Allocation The performance allocation of profits is not a fee, but rather an allocation of profits (separated into all of its components) from a tentative allocation to an investor's capital account to the manager's capital account. From the standpoint of partnership tax law, it is as though the investor never saw the re-allocated amount.
Example 1 All taxpayers are domestic persons subject to the highest income tax rates. Forex Fund, LP, has a General Partner LLC. On January 1, 2008, new limited partner RL makes his only capital contribution of the year of $1 million. His ending book capital account prior to reallocation is $2 million. He is subject to a 20% performance re-allocation. As of December 31, 2008, $200,000 of capital account value is re-allocated from RL's account to LLC's. RL's ending book capital account is $1.8 million.
High-Water Mark It is common for the performance allocation to be subject to a "high-water mark" provision. The high-water mark's function is to ensure that a manager who has made money for an investor and then loses part of that capital cannot take a performance allocation (or fee) until the loss has been made up. Thus, performance can be taken only on the profits above the high-water mark. Investors must recall that performance is always calculated on the fund's economic performance, which will include the net of the yield (e.g., dividends, interest) less fees and expenses chargeable to the investor, and both realized and unrealized profits and losses. When investing in a fund, investors should determine whether performance fees are subject to a high-water mark. Investors should determine the period of time to which the high-water mark limitations apply, and confirm that it is consistent with their redemption rights and investment objectives. High water marks are widely used and are considered a market standard best practice. Further, since investors may join a hedge fund investment at different times, investors should confirm that high water marks are specific for each investor and separately tracked. Example 2 Same as Example 1, except that in 2009 RL's capital account is now $900,000 because the fund lost 50%. No incentive fee is chargeable. In 2010, RL's capital account increases to $1.35 million because the fund was up 50%. If there is a high-water mark provision, LLC gets no performance allocation. If there is no high-water mark provision, LLC gets a performance allocation of $90,000 even though RL is still in the hole.
Example 3 Same as Example 2, except that in 2020, the fund makes 100% (economic) return and RL's (tentative) book capital account is $2.7 million. LLC is entitled to a re-allocation of $180,000 ($2.7 million less the high-water mark of $1.8 million x 0.20). If there is no high-water mark, LLC's re-allocation is $270,000 ($1.35 million x 0.20) and RL would have been subject to a re-allocation twice on the same amount. If the investor is a fiduciary account (trust account, pension plan, endowment, etc.) the prudential concerns of the fiduciary may well require that the fiduciary invest in a fund that has a high-water mark. In any event, the absence of a high-water mark provision may be viewed as indicative of a fund manager not overly concerned with issues of fairness to investors.
Hurdle Rate Many forex funds also have a "hurdle rate" provision. Hurdle rates are also used to guarantee that the forex fund achieves a minimum investment performance before the fund's adviser may receive any incentive allocation. Hurdle rates establish a floor that the investment adviser must exceed to obtain the incentive allocation or performance- based fee. The underlying concept is that an investor could keep its funds in tax-exempt bonds and earn a safe, tax-free return (assume 3.5%). The investor demands that the incentive allocation be calculated only if the manager makes at least that rate -- a hurdle rate. There are two basic types: 1. The incentive allocation is charged only on economic profits made above the hurdle rate. 2. Once the hurdle rate is achieved, the performance is based on the entire economic profit.
Combing a Hurdle Rate and a High Water Mark A high-water mark and a hurdle rate can be combined.
Example 4 Same as Example 1, except that the incentive allocation is chargeable only after RL's book capital account earns a rate exceeding the federal funds rate plus 200 basis points, determined each year based on the rate in effect on the first business day of that year, and that the performance is chargeable only to profits exceeding that hurdle rate. With a hurdle rate of 4.5% for 2008, the incentive reallocation of profit is $155,000 ($1 million x [0.2 - 0.045]).
Example 5 Same as Example 4, except that the incentive allocation is chargeable in full to the profits, provided that the hurdle rate is met for that year. The incentive allocation is $200,000 (same as Example 1). The hurdle rate is optional; it provides an additional layer of computational complexity to whichever of the two alternatives is chosen, although the first alternative is clearly more complex. In some funds, the hurdle rate is quarterly, or even monthly, which is certainly an additional complexity and administrative expense as these calculations must be checked by the fund's accountants. Further, in some funds, the hurdle rate is cumulative; thus in Example 3 above, RL's hurdle rate would have to be calculated separately to determine what the performance allocation is when profitable years kick in.
Withdrawals Many issues go into the performance's calculation. For example, how is performance calculated when an investor withdraws, in whole or in part, prior to the end of the tax year; if there is a hurdle rate, should it be annualized or applied in full?
Example 6 Same as Example 4, except that RL withdraws June 30, 2008. Should the hurdle rate be 4.5% or 2.25%? Proration is the standard practice. What about the high-water mark when an investor withdraws only part of their capital?
Example 7 Same as Example 2, except that RL withdraws half his (much depleted) capital account of $900,000 on December 31. Should his high-water mark be $1.8 million or prorated to $900,000? If $1.8 million, the manager is unlikely to realize a penny of performance from RL for a very long time, if ever. If prorated to $900,000, LLC at least has a fighting chance of making good and earning performance. Again, proration is the standard practice.
Hedge Fund Offering Documents A lawyer should draft hedge fund offering documents. Some hedge fund organizers try to draft their own set of offering documents, however, homespun offering documents are obvious and typically are a mark against a hedge fund and its adviser. PPMs discuss hedge fund expenses, allocations of gains and losses, investment strategies and include tax and financial disclosures. Good offering documents are the key to hedge fund sales. The fund's offering materials and legal documents must clearly spell out the manager's approach to charging fees. Include a description of the fee schedule; the exact formula used to calculate fees owed, including where appropriate, example calculations; the time period for fee calculations; and the source of information to be used to calculate the fee payments. Hedge fund fees should be calculated based on audited portfolio valuations. Where the period of audited financial valuations does not coincide with the fee calculation period, investors should familiarize themselves with the hedge fund manager's portfolio valuation methodologies and the processes used to prepare the fee calculation. Once audited financials become available, the fee calculations should be reviewed and adjusted for any valuation differences. Calculate performance fees based on dollars of value added, not percentage returns or average capital invested for the calculation period. Performance fees computed as carried interest should be calculated on net value added as opposed to gross value added. Offering documents should adequately define "net value added" upon which performance fees are calculated (gross value added less any other expenses charged to the hedge fund). Offering documents should also adequately delineate all types of possible expenses and other charges that potentially could be deducted from fund assets. These expenses may include, but are not limited to: legal expenses, accounting expenses, trustee fees, administrative fees, marketing and sales fees, custodial fees, and general investment management charges. Performance fees should be calculated over a period of time that is appropriate given the volatility of the hedge fund strategy's returns and any lock-up period required by the hedge fund manager. Generally, the more volatile the investment strategy, the longer the period included for calculating the performance fee. Learn About Offering Documents and Review a Sample Outline
Legal Development Process The legal development process is one that requires careful planning. A variety of regulatory issues intersects concurrently when developing a hedge fund: tax, registration, entity type and classification, jurisdiction, security type, and so on. The wisest course of action for those thinking about developing a hedge fund is to consult with qualified legal counsel before taking definitive steps.
Due to the many regulatory issues that must be complied with, it is best to define the structure of your fund properly before commencing any form of fund development or engaging the services of administrators or service providers. The legal development process normally begins with a planning consultation with an attorney experienced in forming hedge funds. This is where important determinations such as registration, jurisdiction choice, and utilization of safe harbors are made. The consultation may expose areas (outside the legal process) that need further planning, thus requiring the manager to deal with those issues before proceeding. After clearing up any such issues, a full engagement is entered into and the legal development process begins.
The hedge fund and investment manager are formed in their appropriate jurisdictions. This enables the fund manager to begin the process of opening bank and brokerage accounts and setting up the administrative functions of the hedge fund. After the entities are formed, the legal team gathers the necessary information to form the operating agreements for the entities and then the offering documents, first in draft stage and then finalized for distribution to prospective investors. The process of setting up a hedge fund usually can be completed within 60-90 days, though registration as an investment adviser, specialized circumstances, or delays in providing information can lengthen the process.
After your Hedge Fund is Launched Consider how you are going to handle the fund's administration. We can handle the preparation of your fund level accounting and annual income tax return filings with Schedule K-1s for a reasonable fee. You don't need any other service providers as we can handle all your business and tax needs under our roof. Why not focus on what you do best and trade? Our hedge fund administration services are ala carte, so you can choose what works for you. We offer monthly basis NAVs, performance records, brokerage statement reconciliation, advisory fee billing, etc. Call Hannah Terhune, veteran hedge fund and international tax attorney at (307) 213-4732 oremail her if you want to discuss these services or if you have any questions.
Customer Testimonial I have had the fortune of working with Hannah Terhune and Capital Management Services on the setup of my hedge fund. As a well funded start up with offshore and onshore investors I needed someone who could help me and my investors navigate the complex tax, regulatory and set up requirements. Her firm supported us each step of the way and we were incredibly impressed with her knowledge, experience and execution. What could have been a very difficult and lengthy process was seamless, well managed and cost effective. We will continue to use Hannah as we grow our assets and would have no hesitation in recommending her to both start up and established managers. Thanks. Warren January 26, 2010
Why Hire Us? When you engage us for hedge fund you get a unique combination of securities, tax, and international experience, focused on the trader niche. We have established a leadership position with traders. We are one destination for all your very special hedge fund and trader tax needs. We think we have the best set of offering documents based on the current and ever changing federal, state and offshore securities, commodities, and tax laws. We aim and deliver quick turnaround times, because we understand that our customers want to begin their money management business as soon as possible. We conceive, structure, and deploy the best tax saving strategies into your hedge fund vehicle (for the benefit of the manager and their investors) and your management company. Investors value tax-savings strategies and we utilize all our special knowledge and ideas in this area. Our customers value our one-stop relationship. We will help you start your business and continue to assist you. Our tax services division handles accounting, software, and tax compliance, including all tax matters (tax planning and tax returns). Only one thing counts with us and that's our customer relationships!
More Reasons to Hire Us When you engage us for hedge fund you get a unique combination of securities, tax, and international experience, focused on the trader niche. We have established a leadership position with traders. We are one destination for all your very special hedge fund and trader tax needs. We think we have the best set of offering documents based on the current and ever changing federal, state and offshore securities, commodities, and tax laws. We aim and deliver quick turnaround times, because we understand that our customers want to begin their money management business as soon as possible. We conceive, structure, and deploy the best tax saving strategies into your hedge fund vehicle (for the benefit of the manager and their investors) and your management company. Investors value tax-savings strategies and we utilize all our special knowledge and ideas in this area. Our customers value our one-stop relationship. We will help you start your business and continue to assist you. Our tax services division handles accounting, software, and tax compliance, including all tax matters (tax planning and tax returns). Only one thing counts with us and that's our customer relationships!
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.
