Starting a hedge fund (again)

A question from Yahoo! Answers:

How is a hedge fund started? What are the requirements/regulations? How to file for company’s broker license?

I would really appreciate it if you could provide me some links to official sites that would answer my questions. Thank you very much!

Hedge funds are not regulated, so there is no official site. The most important requirement is that all your U.S. clients must be accredited investors (individuals with more than $1 million in investable assets or with annual income over $300,000, or organizations with investable assets over $5 million, or regulated financial institutions regardless of assets). Another requirement is that you do not advertise your fund and do not offer it to anyone who is not willing to sign a piece of paper saying they are an accredited investor.

To operate a hedge fund, you do not need a broker license. You might consider getting registered as an investment adviser though.

The mechanics of starting a hedge fund depends on whether you expect to market it to taxable U.S. investors. If that’s the case, you need to structure the fund as a U.S. limited partnership. If you plan to market in only to foreign investors and tax-free U.S. investors (pension plans, college endowments, non-profit foundations, etc.), you can structure the fund as an offshore corporation in a convenient jurisdiction (Bermuda, Caymans, Channel Islands, Luxembourg, etc.) Usually, the law firm (or, in case of offshore fund, firms — one in the U.S., the other in the fund domicile) you hire take care of all the paperwork.

To actually trade, you will need a prime broker (most prime brokerages are units of large brokerage firms, although there are a few specialists). The choice of prime broker depends on what instruments you plan to trade and how much money you have under management (some firms have minimums as high as $20 million, others will work with you even if you have only $1 million).

A good fund usually has an independent administrator (a company that keeps the fund’s books on a day-to-day basis and calculates net assets and performance at the end of each reporting period) and an auditor.

To market your fund, you may consider engaging a third-party marketing firm or use capital introduction service provided by your prime broker.

That’s about it, really…

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