Stonegate Global is uniquely positioned to offer industry-leading fund formation and fund administration solutions, providing unique cross-jurisdictional expertise for domestic and offshore hedge funds.
1. Raising enough capital (seed money)
It is important that a new hedge fund be appropriately capitalized. The dollar amount of assets a fund will need to manage to become profitable will usually depend on three things:
• Team size and expectations
• Investment partners
• Unique cost structure
2. Selecting the right internal team
A competent team will make the manager’s job easier and contribute to the fund’s success. The most important people to hire are traders who are capable of implementing the fund’s strategy. Funds should look for traders who have managed accounts on their own or traded for another fund. There is no room for compromise as far as a trader’s knowledge and expertise are concerned. Fund managers should make sure they review traders’ performance (as audited by a reputable accounting firm) before hiring them.
3. Choosing the most appropriate service providers
Selecting the wrong service providers is an easy mistake for funds to make. Most funds need a prime broker, an administrator, a placement agent, an attorney and an auditor. Avoiding errors in this area is critical because the fund needs these services in order to operate successfully; further, they are part of the image the fund presents to investors in the marketplace. Hiring service providers that are inexperienced or have a poor reputation could affect the fund’s image in a negative way. In contrast, selecting respected professionals with industry experience and solid reputations provides prospective investors with confidence and sets the fund up for success.
4. Using an optimal cost structure
Funds should choose a cost structure that is not only cost effective but also most beneficial to existing or prospective investors. By understanding the fund manager’s investment strategy, including the nature of its targeted investors, your service providers can help select the right structure.
5. Keeping tax considerations in mind
When setting up a hedge fund, there are many factors to consider from a tax standpoint. One of the first items that needs to be addressed is the tax structure of the fund. Most U.S. hedge funds are typically structured as fund limited partnerships, or fund LPs, domiciled in Delaware (that state has a favorable legal environment for business and as such has historically been the preferred locale for U.S. companies).
Read more about Starting a Hedge Fund in the full white paper PDF.
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Stonegate Global is not a law firm and does not provide legal or tax advice.