Introduction Despite the benefits offered by new and emerging managers, investor concentration levels have grown significantly in recent years, with investors increasingly displaying a preference for managers with a longer track record and a “brand name” that inspires confidence from a risk management and governance perspective. Further, the rise and success of “multi-managers” continues to attract assets away from start-up managers, and increasingly, a desire to invest in hedge fund strategies on a capital-efficient basis has driven significant growth in separately managed accounts as an alternative to the traditional fund investments. Ultimately the success of the hedge fund industry relies on its ability to remain diversified, innovative and competitive. New launches and the establishment of new managers are crucial to ensuring this. Hedge fund structuring is often perceived as a well-trodden path and largely a simple exercise of replication. This is often misjudged. While there is certainly a degree of consistency
in the structuring of many hedge fund products, there is a range of considerations a prudent hedge fund manager should take into account in determining the most appropriate structure for their first or subsequent product – and a range of different possible outcomes. The route to launch has also become increasingly complicated by a variety of market developments, including the blurring of liquid and illiquid strategies (particularly in the credit/ debt space) and the increasingly onerous regulatory framework in which hedge fund managers must operate. This guide seeks to address certain key establishment considerations for managers seeking to launch a hedge fund. This paper has been primarily prepared for UK-domiciled managers seeking to establish a hedge fund. Managers in other jurisdictions are invited to contact the authors to discuss any jurisdiction specific differences that may impact the guidance provided herein. (e.g., a corporate) or as a transparent entity (e.g., a partnership or an entity treated as a partnership for U.S. tax purposes). It is possible to satisfy the tax requirements of each type of investor in a single fund structure by using a “master-feeder” fund structure (see “Standalone or Master-Feeder Structure” below). Other Investor Type Considerations The needs and wants of hedge fund allocators can vary considerably, depending on what type of entity they are, which funding sources they are using and to which tax, legal and regulatory regimes they are subject. Familiarity with and the ability to deal easily with different types of investors on a global basis (e.g., pension funds, endowments, private banks, fund of funds, insurance companies, foundations, family offices and any number of other possibilities) is one of the things a new hedge fund manager should consider when selecting its service providers, amongst other matters.
Investors Initial and Target Investor Base
The fund’s initial and target investor base should be the starting point. Ideally, a fund structure should be established that meets the needs of both (including from a jurisdictional, regulatory and tax perspective). If this is not possible, a balance will need to be struck between meeting the needs of the fund’s initial investors, who will likely be critical in terms of the fund reaching a viable size, and the fund’s longer-term target investors. Investor Jurisdiction and Tax Preferences Generally, investors will seek to invest in a fund vehicle that ensures little or no tax leakage at the fund level and does not place them at an undue disadvantage in terms of their own taxation. From the perspective of investors in the U.S. and certain other jurisdictions, the character of the fund from a tax perspective is highly relevant. The fund may be regarded as an opaque entity
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