Start a Hedge Fund in the United States or Offshore
Starting a Hedge Fund Starting a hedge fund to protect and manage your money (and the money of others) makes more sense than ever. If you know how to trade the markets, running a hedge fund is one of the most efficient ways to make earn a living today. Hedge funds are no longer for the elite. For many the dream of running a fund is realized once they figure out what steps they need to take to start a fund. No longer looking toward Wall Street, Main Street is taking care of itself. Successful hedge funds continue to attract the wealthy, the working not-so-wealthy, and those looking for better investment options and control of their money worldwide. The United States offers one of the most favorable environments in the world for hedge fund startups. The purpose of this web page is to highlight key U.S. hedge fund development and planning issues of interest to hedge fund managers worldwide. If you are interested in starting a hedge fund, contact us for a Free Consult with a Hedge Fund Attorney Hannah Terhune. We routinely set up hedge funds both in the United States and in most other countries.
Should I Set Up a Managed Account Business or a Hedge Fund? It costs more money to set up a hedge fund and the process takes a little longer. If you have customers ready, willing and able to commit money now, start by setting up a managed account business and add a hedge fund later. With a managed account business, you do not have to hire an auditor and an administrator. Your customers will open trading accounts at the broker you direct them to and you will manage their accounts pursuant to the managed account agreement you ask them to read and sign before committing to you and your trading program. Contact Us for Assistance Setting Up a Managed Account Business
How long does it take to start a hedge fund? It really depends on your circumstances because no two funds (including the people who want to start them) are completely alike. In the United States, companies can be formed in a matter of just a few minutes. For example, in the State of Florida, a company can be formed over the Internet in less than ten minutes for about $120 USD. In the United States, no minimal capital is needed to form a company. Even a U.S. tax identification number (i.e., EIN or "employer identification number") can be obtained from the U.S. Internal Revenue Service over the Internet. In general, and assuming no registration is required, the average U.S. hedge fund takes about four (4) weeks to organize including the time needed to prepare offering documents and to arrange for the hedge fund's bank and brokerage accounts. Learn More About Hedge Fund Offering Documents Starting a hedge fund? Contact Us for a Free Fee Quote & Consultation
How many investors can invest in a U.S. hedge fund? If you set up a U.S. hedge fund you have two choices. If all of your investors, without exception, are “qualified purchasers,” your U.S. hedge fund can accept up to 500 investors. This type of hedge fund is referred to as a "3(c)(7) fund". "Qualified purchasers" are generally those that have $5 million in net investment assets. Once a 3(c)(7) fund reaches 500 investors, it may be required to register under the Securities Exchange Act of 1934. Learn More About Hedge Fund Regulation If you are not able to satisfy the qualified purchasers only requirement, your U.S. hedge fund will have to operate on a smaller scale; one that can accept up to 100 investors. This type is of hedge fund is referred to as a "3(c)(1) fund". Of the 100 investors it can accept, only 35 can be non-accredited investors. Learn More About Accredited Investors While Section 3(c) of the Investment Company Act of 1940 provides exemptions from registration, it does not negate the need to file a Form D with the U.S. Securities Exchange Commission (SEC) for the hedge fund and state blue sky filings. Learn More About Hedge Fund Law and Learn More About SEC Form D & State Blue Sky Hedge Fund Filings Additionally, operating under one of the Investment Company Act exemptions does not negate the need of the hedge fund's manager to register as an investment adviser.
Equity Funds If the hedge fund trades securities, ETFs, etc., and has U.S. investors, the hedge fund manager will have to register either with the SEC or its "home" state unless an exemption from investment adviser registration is available to it. Learn More About Investment Adviser Registration We offer SEC and state-level investment adviser registration services. Contact Us for Assistance
Why a U.S. Hedge Fund? Even if you are based in another country, consider forming a U.S. hedge fund. The United States offers easy low cost access to the legal, tax, accounting, retail and institutional brokerage, and the regulatory services needed by a hedge fund sponsor to organize a hedge fund. Despite what some hedge fund sponsors think about the purported negativity surrounding the United States, many more establish U.S. based hedge funds because of the minimal expenses associated with starting a U.S. hedge fund and the sheer convenience of having their U.S. based family members and/or other U.S. investors able to invest in the hedge fund. Hedge fund sponsors (i.e., the organizer(s) of the hedge fund) based outside the United States are usually surprised to learn about the “light touch” of U.S. regulation and low costs associated with forming a U.S. hedge fund. Read Our Leading Media Article "American the Beautiful Tax Haven"
Minimal U.S. Legal Infrastructure Needed To start a U.S. hedge fund, you generally need to form two business entities: the hedge fund and its investment manager. The hedge fund is typically set up as either a Delaware Limited Partnership (LP) or Limited Liability Company (LLC). Learn More About Delaware Company Formations The investment manager can be set up as a LLC, or as some other type of business entity in your home state or country. We can form both entities for you quickly and for a low fee. Contact Us for Assistance Hedge fund sponsors based offshore can set up both a hedge fund and its management company in the United States. Learn More About U.S. Company Formations
The United States Allows Hedge Fund Advertising The JOBS Act, signed on April 5, 2012, lifted the ban on hedge fund advertising for hedge fund's operated by fund managers registered with either the SEC or a state regulator. The decades-old restriction on how hedge funds can raise money is gone! Hedge fund managers can speak publicly about their hedge fund's strategies and performance and advertise normal channels. Learn More About Hedge Fund Marketing & Raising Capital
The United States is a Safe-Haven for Business A 2006 Government Accountability Office report, found that most other states do not require ownership information when businesses are formed or don't have to submit periodic reports. Read the GAO 2006 Report of U.S. Company Formations In addition to Delaware, Nevada and Wyoming are advantageous places to set up a company. Learn More About U.S. Company Formations Given the depth, privacy, predictability and pro-business cast of Delaware's company law, it makes good business sense to set up a hedge fund in Delaware. Contact Us for Assistance We offer company formation services, registered agent, registered office & virtual office service in Delaware.
Where do I set up a U.S. Hedge Fund? In the United States, hedge funds are found chiefly in Delaware. U.S. hedge funds are established primarily in Delaware because Delaware offers the most advanced business friendly law in the United States. In fact, Delaware’s business friendly environment is attractive to companies across the globe, not just hedge funds. Learn More About Delaware Companies Governing law matters. Contact Us for Assistance We offer company formation services, registered agent, registered office & virtual office service in Delaware.
Spot Forex, Commodities & Managed Futures Funds If your hedge fund trades spot forex, managed futures or commodities, futures contracts, commodity options (including options on futures contracts), leverage contracts involving certain precious metals, futures contracts and commodity options traded on a board of trade, and/or foreign futures and foreign options and has U.S. investors, you must register with the National Futures Association (NFA), unless an exemption from registration is available. We offer NFA registration services and a filing service for NFA exemptions. Learn More About NFA Registration and Contact Us for Assistance
U.S. Regulatory Filings, Form D & Blue Sky The sale of any hedge fund interest to any U.S. investor triggers federal and state-level reporting requirements for the hedge fund. A timely Form D must be filed with the U.S. Securities Exchange Commission (SEC). The SEC and state blue sky filings are required on any hedge fund that accepts U.S. investors even if the hedge fund trades spot forex, managed futures or commodities or is formed outside the United States. These hedge fund filings are referred to as “blue sky” filings. Blue sky filings have nothing to do with whether the hedge fund’s manager is required to be registered as an investment adviser. The most important thing to understand is that the requirement to file blue sky filings is triggered by the hedge fund’s sale of an interest to a U.S. investor. Many hedge fund managers wrongly believe that simply because they are exempt from registration as an investment manager , the hedge fund they operate is not required to file blue sky. That simply is not the case.
Many U.S. states require that a copy of the SEC filed Form D be provided to the state along with the states’ filing fee. The blue sky filing requirements and filing fees vary from state to state. Moreover, some states require that the hedge fund file blue sky filing on an annual basis (i.e., Alaska). Learn More About SEC Form D and Blue Sky Filings The SEC and state blue sky filings apply to any hedge fund that accepts U.S. investors even if the hedge fund trades spot forex, managed futures or commodities and without respect to whether the hedge fund manager is required to be registered with the U.S. National Futures Association (NFA). We offer SEC Form D filing services and state-level blue sky services for a reasonable fee. Contact us Assistance
Incubator Hedge Funds In the United States, the incubator hedge fund is established with two companies—the hedge fund and its investment manager. In many other countries, a hedge fund incubator can be established with one company and the investment manager can be established at a later date. Until the time you have the offering documents ready for use with customers, you can deposit your own money as “seed capital,” and/or money from friends and family into the hedge fund and begin developing a track record. One of the biggest advantages of the incubator hedge fund approach is that it allows you to start and fine-tune your investment strategy while generating a record of trading performance that can be used to transition to a full-fledged hedge fund when you are ready. The key difference between a full-fledged hedge fund and an incubator hedge fund is the ability to charge performance and management fees and the availability of offering documents. Learn More About Incubator Hedge Funds and Contact Us for Assistance
Hedge Fund Offering Documents Offering Documents are the key to hedge fund sales. While there is no requirement that prospective investors in a U.S. hedge fund be provided with offering documents, it is good (and common industry practice) to do so. Most hedge funds provide written information to their investors in the form of a private offering memorandum. This document goes by many names and acronyms including: private placement memorandum, PPM, Offering Memorandum, OM or prospectus (“PPM”). Do you need a set of offering documents for your hedge fund? For a reasonable fee, we will draft customized offering documents for all types of hedge funds. Learn More About Hedge Fund Offering Documents and Contact Us for Assistance
Hedge Fund Performance and Management Fees Hedge fund managers typically charge a management fee based on assets under management (AUM), and a performance fee (also called an incentive allocation, carried interest, performance share, etc.) based on the hedge fund's success. Management fees are, on average, considerably lower than the perceived industry standard of 2% and 20%. Many hedge fund managers lowered their fees in order to attract investors following recent market events. Some U.S. states regulate performance based fees. In some states, performance compensation can only be paid when the profits of the fund exceed a hurdle rate or on an annual basis. A good hedge fund administrator will help you keep track of the proper fee arrangements. Learn More About Hedge Fund Administration Services Be certain that your expectations about charging performance fees are correct. On the other hand, management fees can be charged to all investors. Learn More About Hedge Fund Performance and Management Fees and Contact Us for Assistance
Consider U.S. Investment Adviser Registration Many hedge fund sponsors based in other parts of the world choose to set up a U.S. investment manager to avoid home country licensing issues and to make the hedge fund more attractive to U.S. investors. Another reason for considering U.S. investment adviser registration is to satisfy a brokerage and/or bank’s requirement that a hedge fund’s manager be licensed somewhere before it is willing to supply bank and/or brokerages services to a new hedge fund. If your home country’s licensing requirements put investment manager registration out of reach, consider getting licensed in the United States. Fortunately, any foreign based investment manager is eligible to register with the U.S. Securities and Exchange Commission (SEC) without regard to the amount of assets under management. The SEC registration process is very simple and relatively streamlined. The SEC, it is a very light regulator of foreign-based hedge fund managers. Learn More About U.S. SEC Registration and Contact Us for Assistance
Use of Investment Adviser Sub-Contracts Many hedge fund sponsors opt to set up a hedge fund management company outside of their home country, whether for tax, commercial, or regulatory reasons. If you (as the hedge fund sponsor) set up the hedge fund management company outside of your home country, you should have a sub-agreement for "advisory" services between yourself and the offshore hedge fund management company. In the United States, an investment adviser is an investment manager. However, there is legal distinction between “investment manager” and “investment adviser” in most other countries. If you live in a country where a such a distinction exists, and if you set up the hedge fund's manager in such a country, you should position yourself through contracts as an investment adviser to the offshore investment manager. Such "advisory" services (i.e., an independent research analyst) is not a regulated business activity. To do this, you need an agreement between the offshore investment manager and a sub-agreement between the investment manager and the investment adviser. The goal of the agreements is to allow you to offer research services to the offshore investment manager for a fee. When the investment advisory agreement is drafted properly and timely executed, you will be able to control the timing, tax character and amount of taxable income reportable in your home country. In addition, if the investment management agreement between the fund and the investment manager are drafted correctly and timely executed, further income deferral is possible. A hedge fund manager seeking to defer substantial amounts of management and performance fees should use third-party (i.e., “outside”) directors to ensure that the deferral mechanisms are respected for home country tax purposes. Contact Us for Assistance
Exemptions for U.S. Based Investment Mangers If you opt to set up a U.S. based investment manager, you may not be eligible for SEC registration. U.S. based investment advisers must register with the SEC or their “home” state. Any U.S. based investment adviser with less than $150 million assets under management must register with its “home” state--you are no longer allowed to SEC register. The good news is that most U.S. states have generous exemptions from registration as an investment manager. A hedge fund manager with less $150 million assets under management based in state that exempts it from state-level investment adviser registration, does not have to register at all with any regulatory authority; provided that the hedge fund does not trade spot forex, futures and or commodities. Learn More About NFA Registration As a result, a U.S. investment manager can be formed and ready for operation relatively soon after initiating the process.
Use of Offshore Hedge Fund Manager to Avoid Home Country (or State) Hurdles A U.S. hedge fund’s investment manager can be set up in your home country, offshore, or in the United States. Unfortunately, many potential hedge fund managers live in countries where the capital formation, tax and regulatory hurdles to become a hedge fund manager are insurmountable. Many countries require a working background in finance, substantial education, and other credentials to be licensed as a hedge fund manager. Even if you have the necessary background and experience, you may not be able to obtain licensing in your home country simply because the regulators do not favor smaller one-man operations. If you are based in a country like that, consider setting yourself up an investment manager, either in the United States or elsewhere.
Set Up a U.S. Hedge Fund Manager In the United States, companies can be formed in minutes and a U.S. visit is not required. Learn More About U.S. Company Formations Note that you can use the hedge fund management company not only to serve as the fund’s investment manager, but also to operate a managed account business (i.e., unlike a hedge fund, managed account customer money is not pooled). When setting up a hedge fund manager outside of your home country (or state), arrange for a “virtual office” so that you have both a working and physical address outside your home country (or state). These arrangements allow you have to a hedge fund manager based in another part of the world with few, if any, regulatory barriers to hedge fund management. We offer company formation services in the United States. Contact Us for Assistance
Hedge Fund Administration Unlike most other countries, there is no legal requirement in the United States to appoint a hedge fund administrator. Hedge fund administrators provide detailed NAVs, performance records, brokerage statement reconciliation, tear sheets, and much more. Investors and regulators see value in the appointment of a third-party administrator because an independent party performs due diligence on new subscribers, calculates the share price and reports hedge fund results to investors. Learn More About Hedge Fund Administration and Costs and Contact Us for Assistance
Hedge Fund Banking and Brokerage Services You cannot use your personal account as the hedge fund’s account. The hedge fund needs its own bank and brokerage account. The hedge fund does not need a prime broker or an introducing broker so you should consider using the broker with which you are already familiar and presumably have a good trading record. Nearly all small hedge funds start out with retail online brokers. Many hedge fund sponsors of offshore hedge funds want to use a U.S. broker. While it may take a while to open a U.S. brokerage account, the process can be speeded up considerably when offshore hedge fund has a bank account. In the United States, bank accounts can be opened over the Internet with minimal documentation and very modest initial deposits. In addition, operating costs—such as monthly bank maintenance fees - are relatively low in the United States when compared to most other countries. Banking in the United States presents a lesser burden to a hedge fund sponsor than banking in most other parts of the world. U.S. banks and brokers generally do not require a hedge fund’s investment manager to be licensed by a regulator in order to open accounts. For these reasons, the United States presents an extremely attractive option for sponsors of smaller hedge funds. Contact Us for Assistance
Getting Started You should know knowing how the hedge fund development process works. We understand that the process is new to you. We provide you with hedge fund deliverables in stages. During the "Draft Stage" we send you the terms sheet for hedge fund offering documents. You complete the hedge fund terms sheet and return it to us. We prepare the first draft of your hedge fund offering documents and send it to you. for review and comment. During the "Review Stage" we continue working with you and revise your hedge fund offering documents based on your input. During the "Launch Stage" we prepare your SEC Form D for electronic filing and any state blue sky filings that are needed. We prepare the final draft of your hedge fund offering documents and send you instructions as to how to operate your hedge fund. At this stage, you should also consider how you are going to handle the hedge fund's administration. Are you going to try to save some money and trade your fund, handle its accounting, and prepare the tax filings for your investors? Why not focus on what you do best and trade? We can assist you with hedge fund accounting, tax and audit matters. Call Hannah Terhune at (307) 213-4732 or email her if you want to discuss these services or if you have any questions. Informed clients are our best clients. We want you to get your new hedge fund business established on solid ground.
What are Accredited Investors? Recently the SEC changed the definition of a qualified client and accredited investor. SEC rules permit certain private and limited offerings to be made without registration and without requiring specified disclosures, if sales are made only to "accredited investors." Generally, accredited investors include individuals with a minimum annual income or $1 million in net worth, excluding the value of the primary residence, and most entities and institutions with $5 million in assets. A non-accredited investor is simply one that does not meet the definition of an accredited investor. A U.S. hedge fund can accept up to 35 non-accredited investors. Learn More About Accredited Investors
Should I Avoid Non-Accredited Investors? Not necessarily. However, if you allow non-accredited investors to invest in the fund, you need to have an initial financial statement prepared (read: audit). Make sure that your non-accredited investors have sufficient knowledge and experience in financial matters in order to evaluate the merits and risks of investing in your hedge fund. Learn More About Hedge Fund "Launch" Audits Your offering will proceed much smoother when you allow only accredited investors in your fund. If you allow non-accredited investors, you must prepare your offering documents as if you were offering the securities publicly. In addition your non-accredited investors must (alone or together with his purchaser representative) be sophisticated; they must have sufficient knowledge and experience in financial to evaluate the merits and risks of investing in your hedge fund. Securities acquired in Regulation D offering under Rules 504 (in most offerings), 505, and 506 are restricted; they are subject to limitations on resale. This limitation also means that purchasers or their representatives may have to sign an investment letter acknowledging that the investor cannot resale the securities.
Qualified Clients and Performance Fees SEC registered (and many state registered hedge fund managers) hedge fund managers can charge a performance fee (also referred to as an incentive allocation or performance allocation) only to qualified clients. The performance fee cannot be charged either to accredited or non accredited investors. Generally, qualified clients include individuals with a net worth of $2 million, excluding the value of the primary residence, or investors with $1,000,000 million of assets under management with the hedge fund manager. Learn More About Qualified Clients
U.S. Hedge Fund Incubator Formation $2,400
U.S. Hedge Fund Offering Documents For "Plain Vanilla" Funds Trading Equities Customized For Your Hedge Fund $6,000
CapitalManagementServicesGroup.com is recognized by discriminating fund managers and businessmen 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 related tax laws. Ms. Terhune's extensive knowledge and experience have made her an indispensable resource for serious hedge fund and business 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. We have both regulatory experience and the understanding of the foreign exchange and securities markets. We know how to navigate the compliance with rules and regulations in the United States as well as in regulated jurisdictions such as United Kingdom, Singapore, Hong Kong, Canada and the British Virgin Islands. Each client receives personalized attention from our attorneys and staff. No client is too large or small though because of our boutique size. We pride ourselves in providing personal attention to each client.
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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!