Start Up Funds

Funds

Funds have historically been viewed as nimble investment vehicles run by savvy managers who are able to produce steady and absolute returns.  Funds come in a variety of different sizes and strategies.  The great diversity of funds and their investment objectives is what makes them exciting, but which also makes it difficult to describe them as a whole.  Whatever investment strategy an investor is looking for in, there is a fund which would be able to meet the needs of that investor.

Hedge fund investments are made through private placements in most fund-friendly countries.  This means that only the  fund manager and certain fund brokers can offer an investor interests in a hedge fund, and that is only if the manager or the broker has a pre-existing relationship with the investor.  There are some ways which investors can gain access to hedge funds, most notably through hedge fund databases.

Braxton and your start up  fund

A fund lawyer is the first service provider a start up hedge fund manager will likely contact.  A fund lawyer needs to understand what is going on in the industry. As such the fund lawyer will spend a good portion of his day talking with service providers to see what are the developing trends within the industry,  researching issues for clients and talking with regulators to see what are some of the things they are focusing on. Your fund lawyer should have an ear to the ground and understand the issues which affect you from both a business and regulatory perspective.

After listening the manager and discuss the investment program, Braxton fund lawyers specialists will begin drafting the fund’s offering documents and may also suggest the other service providers the manager should talk to (including the administrator, auditor, and brokers). After the offering documents have been finalized, Braxton´s  fund lawyers will help the manager with many of the logistical items which need to be addressed before the fund begins doing business.

Once the fund has started trading the fund manager may need Braxton´s fund lawyers to do the following items:

  • Consult with the manager if investors have certain needs
  • Consult with the manager to start a new fund
  • Provide updates on relevant fund laws
  • Revise the offering documents if necessary
  • Draft side letter agreements for certain investors
  • In some countries, a  fund will need to make a filing in each jurisdiction where one of its investors resides.  This filing will generally need to be made within 15 days of the date of the investment into the fund and the investment manager will need to pay a small fee
  • Review marketing and other promotional materials
  • Help prepare manager for investment advisor or commodity pool operator audits (if necessary)
  • Fund due diligence, if required

In addition, Braxton´s fund lawyers are going to be a resource for the manager and the fund on an ongoing business because our lawyers have generally experienced most issues which will arise in the fund context.

Why Braxton?

Fund formation costs can be high and if you use a very large law firm the legal costs could be double or more.

If you are a very large fund with very large assets during the first year of operation, you are probably going to go with the very large law firms which have very good reputations for fund work. Funds smaller than this may decide to go with the boutique firm for cost savings purposes, but they may also decide to go with the large law firms if they feel that there is need to show “name brand” service providers in their offering documents.

Many start up hedge funds choose to go with the boutique law firm, like Braxton, because of the direct access to partners. At the large law firms most client matters are handled at the associate level and the partner may only talk to the manager once or twice.

The most important items when choosing a fund lawyer is to make sure you are comfortable with the lawyer and his knowledge of the industry. When starting out the fund start up process can take up to two or more months depending on the complexity of the project so you will want to make sure you have a good working relationship with your lawyer.

Timing for Starting a Fund

Many prospective fund managers know that they would like to start a fund are faced by the fact that the timing of an actual fund launch cannot usually be determined with absolute certainty and will depend upon, in large part, their program and their service providers.

A good rule of thumb (for managers who do not need to register as investment advisers with their jurisdictions; in this case you should add anywhere from 3 – 6 weeks to the process) is that the fund formation process should take about 2 months in fund-friendly countries. Often a fund can be up in running in less time, but this is constantly changing.

In general the timing might look like this:

Day 1 – Discussion with legal counsel regarding the structure of your fund (fees, contribution provisions, withdrawal provisions, other items to be included in the legal documents). During this time you will also discuss your investment program and your background.

Day 7-10 – Delivery of offering documents (usually around 100-120 pages in length; sometimes more). During this time your legal team should respond to you with your legal documents. Your fund’s legal documents will include the following:

  • Private placement memorandum
  • Subscription documents
  • Limited partnership agreement (or limited liability company operating agreement) in the case of US funds

Day 10-14 – Review of your offering documents. During this time you should be reviewing the offering documents and familiarizing yourself with their provisions. You will need to understand . If you don’t understand what any legal provisions in your documents mean, be sure to ask your lawyer. Remember, these are your legal documents and you paid very good money for them – you should know what they say.

Day 18 – Discussion with legal counsel regarding offering documents. You should bring up items which you have questions on and your lawyer should run down the key points of the offering documents with you.

Day 25 – Delivery of revised offering documents. Your legal team should be able to deliver you revised offering documents within about a week. At this time the offering documents are very close to being complete. You should review the documents to make sure that all your questions have been addressed and your changes incorporated. If the revised wording does not make sense, let your attorney know as soon as possible.

At this point these offering documents are in good enough shape to send to your administrator and your auditor (if you decide to name an auditor in the offering documents). In addition, you should begin the account application process with your brokers.

Day 25-32 – Begin finalizing service provider contracts and make sure all service providers are on the same page. The brokerage account application can potentially be a stumbling block in the process. Certain brokers have certain due diligence requirements which must be met before the account will be ready for live trading. You might not know of these requirements beforehand or the broker’s compliance department may come back with extra requirements – you never know what might be required. The brokerage account opening process is the most uncertain in terms of time.

Day 32-46 – Last minute prep work with the legal team and service providers. The auditors or administrators may have some minor comments for the lawyers on the offering documents. Some of these service providers may require certain disclaiming language regarding the services which will be provided.  Your lawyer will send you finalized offering documents during this time.

Day 47-60 – Begin getting ready for trading. You should make sure that everything is in place for a smooth first day – make sure you know when and how you will be doing your trading. Make sure you will have assets in the brokerage account on Day 1. Make sure your computers will be working.

Fund Management Company Expenses

  • offering expenses 
  • salaries, benefits and other related compensation of the management company’s employees
  • rent
  • maintenance of its books and records
  • computers
  • fixed expenses
  • telephones
  • general purpose office equipment

Fund Expenses

  • fund management fee
  • fund performance allocation
  • the administrator’s fees and expenses
  • accounting and tax preparation expenses
  • costs and expenses of entering into and utilizing credit facilities and structured notes, swaps, or derivative instruments
  • quotation and news services (Bloomberg, etc) (can be a management company expense)
  • ongoing sales and administrative expenses (e.g. printing)
  • legal and fees and expenses related to the fund
  • auditing
  • all investment expenses (such as brokerage commissions, expenses related to short sales, clearing and settlement charges, bank service fees, spreads, interest expenses, borrowing charges, short dividends, custodial expenses and other investment expenses)
  • optional: professional fees (including, without limitation, expenses of consultants and experts) relating to investments
  • optional: the management company’s legal expenses in relation to the Partnership
  • optional: advisory board fees and expenses
  • optional: reasonable out-of-pocket expenses of the management company, for example, travel expenses related to due diligence investigations of existing and prospective investments
  • other expenses associated with the operation of the hedge fund, including any extraordinary expenses (such as litigation and indemnification)

While the above list of expenses is fairly standard, please remember that these expenses can be switched around to a certain extent.