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Hedge Funds
Customer Testimonial Hannah and her team are experts in their field of offshore funds. The expertise and care to think ahead of all the specific issues I might have as a client are greatly appreciated. Capital Management Services Group applies a no-nonsense and straight forward business approach to a complex maze of international rules and regulations. I'm pleased to have them on my team and certainly recommend them to any professional looking for guidance in the hedge fund industry.Andre Voskuil, DutchOracle Capital Ltd. December 28, 2011
Starting a Hedge Fund Creating a hedge fund to protect and manage your assets, or the assets of others, makes more sense than ever before and is one of the most efficient ways to make money these days. Hedge funds and family offices are not just for the extremely wealthy. We work with two types of people: (1) those who want to run a hedge fund or family office, and (2) those who are interested in investing in fund(s). Hedge funds and family offices attract a variety of investors, including: the working wealthy and their IRAs, high net-worth investors, other family office and/or small business looking for safety and superior returns. For those interested in starting a hedge fund or family office, we can help you get your fund started and ready to do business; the rest is up to you. The hedge fund industry promises to offer great potential in the years ahead. How long does it take to start a hedge fund? It really depends on the particular circumstances because no two funds (including the people who want to start them) are completely alike. However, in general, and assuming no registration is required, the average U.S. hedge fund can be created and ready to launch within 4-6 weeks.
Customer Testimonial I had a tremendous experience with Hannah and the Capital Management Group. They were timely, courteous, and extremely knowledgeable; and, if Hannah was busy, Michelle made quick work to resolve my problems. I will invariably use CMSG in the future for all my hedge fund needs! I can't thank Hannah enough for making my dream of a hedge fund come to fruition. William B Hoagland, Trend Discovery Capital Management. July 06, 2011
Where do I set up the Hedge Fund? Hedge funds tend to be concentrated in a few places worldwide. In the United States, hedge funds are found chiefly in Delaware. Outside the United States, several countries in the Caribbean and Europe offer a range of benefits to fund managers. Basic administrative fees are similar worldwide, but regulatory oversight adds to the expense in European countries. Because banks and large hedge funds like to have regulatory oversight for their retail hedge funds to reassure institutional investors, the majority of hedge funds are established by small operators for whom any extra costs are a burden. Learn More About Starting an Offshore Hedge Fund
What is the typical legal structure? To start a hedge fund you need to create the fund entity and its investment management company. In the United States, the fund is established as a limited partnership and in some cases, or as a limited liability company for offerings with multiple share classes. The investment management company may often function as the fund's general partner and may be set up and taxed as a pass-through entity in most cases. For an offshore fund, both the fund and investment manager are set up as corporations in different countries for tax and regulatory reasons. Click Here for a Hedge Fund Business Plan
How many investors can invest in my hedge fund? A 3(c)(1) hedge fund can have up to 99 investors, while a 3(c)(7) hedge fund can have up to 499 investors. For offshore funds, the numbers are much more generous. What are Accredited Investors? Generally, accredited investors include individuals with a minimum annual income or $1 million in net worth, and most institutions with $5 million in assets. Under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the definition of an accredited investor has changed slightly. A U.S. hedge fund can accept up to 35 non-accredited investors. The new financial reform law becomes effective on July 21, 2011. 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 (low-cost) launch 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. A U.S. hedge fund may have up to 35 non-accredited investors.
Qualified Clients If you are an SEC licensed investment adviser, you can only charge the performance allocation to qualified clients, which is a higher grade of investor than accredited investor. Some states follow federal law on this point; others do not. Learn More About Qualified Clients What are Hedge Fund Performance and Management Fees? Fund managers 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 fund's success. The market crisis changed the fundraising environment, as a result, the traditional "2&20" fee structure is becoming less common. Today, just over a third of hedge funds charge "2 & 20." Management fees are, on average, considerably lower than the perceived industry standard of 2%. Many managers have lowered their management fees in order to attract investors following the market crisis. The performance share provides a percentage of the fund's investment returns. The typical management fee of a hedge fund is about 1.65%, and the average performance fee is about 18% of the fund's total return. Performance is calculated on a cumulative basis against a high-water mark so that performance fees are not paid out (or are reduced) until the losses are recouped (though some funds limit the number of years of loss carry-forward for the purposes of calculating performance fees). There are state regulations regarding 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.
Tax Treatment of Hedge Fund Performance and Management Fees Management and other fees paid to investment managers are deductible expenses, subject to limitations. For the hedge fund manager, the net fees are income from self-employment subject to Social Security taxes and ordinary income for income tax purposes. The performance allocation of profits is not a "fee" per se, 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. Learn More About Hedge Fund Taxes
Keep Fund Accounting Simple The hedge fund manager who has a highly complex performance allocation and expects the financials and tax returns by March 1 is tempting fate. The manager must recall that once the investor is promised something, less cannot be given. At the very least, no manager wants to go back to investors and ask them to sign amended fund documents about how the manager's own cut of the profits is determined. What is a 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. Learn More About Hedge Fund Manager Performance and Management Fees What is a Hurdle Rate? Many hedge funds also have a "hurdle rate" provision. Hurdle rates are also used to guarantee that the hedge 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.
Can a Hurdle Rate and a High Water Mark be Combined? Yes, a high-water mark and a hurdle rate can be combined.
Fund Incubation and Incubator Hedge Funds There is an alternative approach for those who want to test the waters before spending $10k or more to set up a hedge fund or family office. Setting up an incubator hedge fund allows you to develop a track record which will assist in attracting investors at a later date. An incubator is created by breaking down the hedge fund development process into two stages. The first stage sets up the hedge fund and investment management company. Completion of the first stage allows you to trade and create a performance record using your own or other's money as seed capital. In the second stage your offering documents are developed and your performance record is compiled for circulation to prospective investors. Starting out with an incubator hedge fund affords the opportunity for those with a skill for trading to break down the hedge fund development process into a manageable undertaking. Managers will incubate a fund by managing their own money for 6?12 months within a limited partnership to establish a marketable track record. Learn More About Incubator Funds
Hedge Fund Administration You do not need to hire an administrator to start a small hedge fund, although it is a good idea if you do not have time to deal with hedge fund accounting. Administrators provide hedge fund accounting services, including net asset calculations, fee calculations and general administrative support. Many funds hire a third party to provide administrative services. Among the services administrators may provide are the following: operating the fund?s bank account; issuing payment instructions; providing net asset calculations; and, calculating management, performance, and other fees. Costs for administration services vary significantly depending on the scope of services provided. Learn More About Hedge Fund Administration
Hedge Fund Initial and Annual Audits If you allow non accredited investors in your hedge fund, you will need as initial "launch" audit (also called a "seed capital audit"). Investors are reluctant to invest in a fund that does not undergo an annual audit and provide these financial statements. Costs for audit services vary significantly depending on the complexity of the fund?s investment program. We can introduce you to auditors that we work with. Can my hedge fund have a website? Yes. You can use a web site that is SEC compliant. Promotional activities involving the use of web sites and providing information to organizations that track hedge funds should not used without the advice of counsel. Interests in a hedge fund are sold pursuant to a private placement exemption and should be marketed without using general advertising or solicitation. In some sense, the manager should have a pre-existing relationship with everyone who is offered interests in the fund.
How can I find investors? You will need to build on existing relationships using direct personal contact to identify prospective purchasers or approach preexisting business relationships. Hedge fund marketing has evolved into an industry of its own. Internet marketing, advertising and promotion are key elements, but unlike other businesses, there are significant restrictions when it comes to hedge funds. Learn More About Finders Fees, Internet Marketing and Selling Agreements SEC Form D and other Blue Sky Filings In the United States, a notice of sale on Form D must be filed by the issuer in connection with any offering under Regulation D. SEC Form D is filed with the SEC and updated annually. It is also required to be filed for the fund in most states. Learn More About SEC Form D Can I Accept IRA Money? Yes. Generally speaking no more than 25% of the value of the fund should be held by employee benefit plan investors of any description including ERISA plans, IRAs, 401(k) plans, state funds, or other employee benefit plans unless the fund complies with ERISA. IRAs themselves do not constitute ERISA assets but must be considered for the 25% calculation.
Investment Adviser Licensing and Registration Requirements Many states require that you register as an investment adviser. Each state has different registration requirements and exemptions. If a state does require a manager to be registered, usually the manager will be required to have passed the Series 65 exam. You may choose to register as an investment adviser even if not required to do so by your home state. No sponsor is needed to take the Series 65 exam. If you have a large amount of assets under management you may need to register with the SEC. Click Here to Learn More About Our Investment Adviser Registration Services. Do I need a Series 7 to run a hedge fund? No. Forex Trading If your hedge fund will also trade in spot forex, your fund is also a forex pool and you may need to register as a forex pool operator with the National Futures Association. Learn More About Starting a Forex Fund
Commodity Trading If your hedge fund will also trade in futures contracts, commodity options (including options on futures contracts), leverage contracts involving certain precious metals, futures contacts and commodity options traded on a board of trade, or foreign futures and foreign options, your fund is also a commodity pool. Unless you operate an exempt commodity pool, you will need to register as a commodity pool operator with the National Futures Association. You must take the Series 3 Exam and start the process of becoming a member of the National Futures Association. Learn More About Starting a Commodity Pool
Brokers You do not need to use a prime broker or an introducing broker. Nearly all small hedge funds start out with retail brokers, meaning you can continue to trade as usual. An introducing broker (IB) is a registered broker that has an agreement with a clearing firm to use that clearing firm's custody, clearing and/or other services to be the backbone of their securities business. What are Hedge Fund Side Letters? Investments in a hedge fund are subject to the fund's offering documents (PPM, limited partnership agreement, etc.). A hedge fund manager may enter into a separate agreement (e.g., side letter) with an investor in the hedge fund. Typically, seed capital investors and large institutional investors seek preferential terms from a hedge fund's manager in the form of a side letter which details the recipient's preferential treatment. Other investors in the fund do not benefit from the terms of the side letter. They may provide the investor with reduced fees or impose limits on the expenses that can be charged to the hedge fund. Side letters may grant the investor special redemption rights and modify the lock-up period. The problem with side letters is that they may create a new share class in the fund and/or cause a breach in the hedge fund manager's fiduciary duty to the hedge fund. Fiduciaries of a hedge fund owe an identical obligation to each investor in the fund. Office Space Advances in technology and the proliferation of information have made investment research and trading convenient as well as efficient. You can work from any location where there is high-speed Internet service. The industry cannot keep track of all the investment managers and their business operations. One has to wonder about the so-called official statistics claiming to track this powerful cottage industry. There is no stigma to running a hedge fund or family office from home. Hedge fund managers (the best in the business) work from home and enjoy family life.
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
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.
Customer Testimonial Hannah Terhune and her team are always available and ready to work with you, with a nice attitude and assisting in a very professional way. Their wide spectrum of services and knowledge really make a difference when you look for consulting. jxxxxxx August 10 2010
Exchange Traded Funds Some hedge funds invest exclusively in exchange-traded funds (“ETF”). You should make sure that your offering documents fully disclose the risks of investing in ETFs. ETFs are a recently developed type of investment security, representing an interest in a passively managed portfolio of securities selected to replicate a securities index, such as the S&P 500 Index or the Dow Jones Industrial Average, or to represent exposure to a particular industry or sector. Unlike open-ended mutual funds, the shares of ETFs and closed-ended investment companies are not purchased and redeemed by investors directly, but instead are purchased and sold through broker-dealers in transactions on a stock exchange. Because ETF and closed-end fund shares are traded on an exchange, they may trade at a discount from or a premium to the net asset value per share of the underlying portfolio of securities. As a relatively new type of security, the trading characteristics of ETFs may not yet be fully developed or understood by potential investors. In addition to bearing the risks related to investments in equity securities, investors in ETFs designed to replicate a securities index bear the risk that the ETF’s performance may not correctly replicate the performance of that particular index. Investors in ETFs, closed-end funds and other investment companies bear a proportionate share of the expenses of those funds, including management fees, custodial and accounting costs, and other expenses. Trading in ETF and closed-ended fund shares also entails payment of brokerage commissions and other transaction costs.
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.
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.
Why Hire Us? We advise individuals on hedge fund startups worldwide. We are experts on investment adviser law, hedge fund law and forex and managed futures fund law. We handle state investment adviser registrations, SEC investment adviser registrations, U.S. hedge fund formations, foreign hedge fund formations, forex fund startups, managed futures fund startups, commodity pool formations, NFA registrations, international hedge fund formations, and investment manager registrations in many countries.
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.
