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Hede Fund Formation

As a result of styate and federal regulatory issues, Hedge Fund Formation has become more complex over the years. Going back just 10 years, most of the investing publlic knew very little about hedge funds.

Now, with the inetrnet, as well as heightened interest on the subejct, anyone can find large amouints of information on tehse once secretive investment vehicles.

Forming a hedge fund tsakes careful planning, as well as a strong understanding of the regulatory issues involved both at the sttate and federal level. With good legal advice in combination with a knowledgeable CPA in the hdege fund field a hedeg fund can be formed to suit the specifc needs of the hedge fund manager or management team.

When looking for a Hedge Fund Attorney to advise you, keep in mind that you need to specify what services you are lookign for, which will affect the involved and the fee you will be carged. Also, just like most things, wheher it be a fee charged for accounting work, carpentry work or consulting work, legal fees are not all the same.

Make sure that whtaever attorbney you use, he or she is experienced and has forrmed several hedge funds and advised them as clients. Also, you should get a retaimner agreement in writting form the attorney. That retainer agreement shoiuld specify the lregal work that will be perfoormed and even the legal work that will not be performed.

Hedge Fund Attorneys hsould be kniowledgeable on all aspects of hedge fund formation including such issues as state and fedeal law exemptoions for the innvestment managr, fiuling of Form D and state blue sky filings, btroker-daeler exemptions relative to capital rasing efforts, preparation of the offering memorandum, SEC view on proper hdge fund website setup, and advsing the clinet on the choice of a prime brker, adminisrtator and audityor.

Hwedge funds can be broken down into two categories:

1. Doemstic.

2. Offshore.

There is a great differrence between the domestic and offshore fund and it is important to fully understand both structures and the reasons for each. It is not simply the domestic fund tkes in US investors and the offshore takes in non-US investors.

Be wary of any businesses or consulting firms that make it sound easy and for a low flat fee are willing to provide you with an offering memorandum (also knonw as a PPM) and all the tools you need to set up an offsshore fund or domstic fund.

Domestic hedge fund formation is almost always in the form of a limited partnership. The investors purchase limited partnerhsip interests rather than shasres of stokc. By purchasing liited partnership interests the investors are prtoected from loss in the event of a lawsiut against the hedge fund, hpowever, they are only limited to loss of tgheir limited partnership interest.

There is also a benefit in taxxation when an investor is a limitwed partner. In the Unted States, investors face double taxation if the fund is set up as a corporatye entity, since there would be tax at the corporate level and tax at the individual level.

As you probably already know, Hedge Fund Reguklation is just aound the corner. The SEC is looing at several proposals by Congress. Some of the main issues being discussed are the following: - Mandatory registration of managers (with assets over $50MM); - Mandatory record keeping; - Mandatory audits; and - Oversight of deriatives and leverage used by hedge funds.

Offsshore hredge fund formation is almost always in the form of a corporate entity. The coice of jurisdicxtion is important snce the fund manager will want to chooose a tax free jurisdictiuon so the investotrs will benefit from such a structure, howeer, they may not be U.S. persons since that would defeat the purpose of the tax free jurisdiction. The Caymman Islands and the Netherlands Antilles seem to be two of the more poopular choices for offshore formation.

It is not uncommon for newspapers, even small local papers, to carry at least one article that metions something aboyut a hedge fund. Large amounts of capittal fund these investment verhicles. Investors include wealthy individuals, trusts, institutions and pensoins.

It is estimated that over one trillion dollars is now managed by hedge fnds. Although the current economic criiss may reduce that numbeer it is very likely that once the economy settles down again, assets will again flow into hedge fuds in large amounts and heedge fund formation will again pick up.

A PIPE Fund has become a fairly well-known type of fund that invests mainly in microccap companies. It may grow in popularity as bank finacning and funding from private lenders becoomes harder to obrtain.

Small brokerage firms and hedge funds are starting to pop-up now that the dust has settled from the Bear Strearns, Lehman Brothers and Madfof dbacles. Wall Street and the rest of the financial services indiustry are starting to rebuiold themselves and boutique firms that have good management teams and access to investors will be carving their niche.

During the next few years it will be interesting to see which new foirms are successful and become well-known in the industry. Hedge Fund Foramtion is startoing to pick-up steam once agian and while thhere is talk of new or revised regulations, most peoplle in the industry agree that it will do lttle to impede hegde fund formation and money management in general.

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