New Funds
Hedge Fund Start Up Checklist
Operating Considerations
Clarify your investment strategy and unique edge – Demonstrate your specific expertise and discuss the kinds of markets you will trade and invest in and the instruments you will use to implement your strategy.
- Global Macro
- Directional
- Event-driven
- Relative value (arbitrage)
Develop a strategic business plan:
- Budget
- Cash flow projections – fixed vs. variable costs
- Evaluate which expenses should be paid by the management company, and which should be absorbed by the fund
- Timeline for execution
Prepare an executive summary and basic term sheet – Include a description of basic terms.
- Strategy
- Management fee
- Incentive fee (allocation)
- Minimum subscription amount
- Redemption provisions
Select external consultants – Consider their experience and reputation in the hedge fund industry and their ability to grow with the business and adapt to change. Weigh that against costs, the level of service you expect and the importance of your business to the provider.
- Attorney
- Prime broker/custodian
- Independent accountant
- Fund administrator
- Regulatory consultant
- Independent valuation consultant
- Independent directors
- Information technology (IT) consultant and support
- 3rd party marketers/fundraisers
Select names for the operating entities and the fund(s) – Obtain tax ID #’s and fund incorporation for foreign entities.
- Fund
- General partner
- Managing member
- Investment manager
Select members of the management team – Consider forming an Advisory Board and Valuation Committee, and outsourcing the CFO and CCO positions.
- Chief Executive Officer
- Chief Operating Officer
- Chief Investment Officer
- Chief Financial Officer
- Chief Compliance Officer
- Others
Set-up Shop
- Banking relations
- Office space
- Business equipment
- Trading accounts
- Staffing
- Website
- Technology
- Other
Structure
Specify structure and type of investment entity. Consider:
- Type of investments
- Type of trading activity
- Type and number of investors
- Hedge vs. private equity vs hybrid
- LP vs LLC
- 3(c)-1 or 3(c)-7
Determine legal entity, structure and appropriate jurisdiction:
- Onshore
- Offshore
- Parallel
- Master-feeder vehicles
Evaluate registration options and costs to assure compliance – Register as a Registered Investment Adviser (RIA); develop compliance program and manual.
- Blue Sky laws
- Potential regulatory changes
Determine the provisions to be included in your offering document:
- Capital transactions
- Subscriptions
- Redemptions
- Lock-up periods/suspensions
- Allocation of profit and losses
- Incentive allocation or fee
- High-water marks, loss carry-forwards, hurdle rates and claw-back clauses
- Side pockets
- New issues
- Management fee
- Portfolio valuation
Determine year-end tax reporting needs:
- Aggregate vs. layering approaches for maintaining records
- Trader vs. investor
- Section 475 election
Establish compliance, risk and valuation guidelines – Document the process, review by a valuation committee and approve on a regular basis.
- Valuation policy must be in accordance with generally accepted accounting principles (GAAP)
- Market valuation approach
- Broker Quotes
- Comparable public securities
- Recent transactions
- Market multiples and EBITDA calculations
- Income approach:
- Future discounted cash flows
- Capitalization rates
- Market valuation approach
Document Review
Prepare and review with appropriate parties:
- Articles of Association
- Offering Memorandum
- Subscription Agreement
- Partnership Agreement
- Investment Management Agreement
- Due Diligence Questionnaire
- Compliance and Risk Guidelines and Manuals
- Prime Brokerage Agreements
- ISDA Agreements
- Custody Agreements
- Counterparty Risk Agreements
- Valuation Policy
- Marketing and Website Materials
- Code of Ethics
- Form ADV