Hedge Fund Frequently Asked Questions. I have just started this page and I hope to add to it in the coming weeks and months to address many of the more frequent questions I receive. Please note that while the answers below were prepared by a hedge fund attorney, these answers are for informational purposes only and they do not create an attorney-client relationship. If you have any questions or seek further clarification, please contact us or discuss with your hedge fund attorney.
Does a hedge fund manager need to be a registered investment advisor?
Generally it will depend on the hedge fund manager’s state of residence. It may also depend on whether the fund exceeds the 25% ERISA threshold. For more information, please see: Overview of Investment Advisors, Hedge Funds and ERISA.
Does a manager need a Series 7 license to manage a Hedge Fund?
No. A Series 7 exam license is not required to manage a hedge fund. However, if the hedge fund, or an affiliate, is registered as a broker-dealer, the manager may need the Series 7 depending on his duties with the fund or affiliate. For more information please see: What Licenses Does a Manager Need to Run a Hedge Fund, Hedge Fund Series 7 questions.
Does a manager need a Series 7 license to manage a Forex Hedge Fund.
Generally no. However, depending on the nature of the forex hedge fund, the manager may need to be registered as a commodity pool operator. If the hedge fund manager were required to be a commodity pool operator the principal, and traders, would need to have a Series 3 exam license. For more information, please see: How to Register as a CPO or CTA, Hedge Fund CPO exemptions.
What does it cost to start a hedge fund?
There are many costs associated with starting a hedge fund. Generally a hedge fund sponsor will need to retain a hedge fund attorney, auditor and administrator as well as establish bank and brokerage accounts. All of these relationships create costs for the hedge fund manager.
How long does it take to start a hedge fund?
It will generally depend on how prepared the manager is and how fast the attorney’s can work. It will also depend on whether the manager will need to be registered as an investment adviser. In general though, assuming no registration is required, a sponsor should be able to get a fund up and running within 6-8 weeks. Please see: Start Up Hedge Fund Timeline.
How many and what type of investors can I have in my fund?
There are two types of hedge funds: 3(c)(1) and 3(c)(7). A 3(c)(1) hedge fund can have up to 99 investors. Generally these investors will need to be “accredited investors” although some funds will choose to have up to 35 non-accredited investors. Generally also these investors will be “qualified clients.” A 3(c)(7) hedge fund can have up to 499 “qualified clients.” For more information please see: Hedge Fund Investors Overview.
Can an IRA invest in a hedge fund?
Generally yes. However, if a hedge fund is planning to have IRA investments there are some items which the manager should discuss with his attorney. For more information, please see: Hedge Fund IRA Investments.
How does a hedge fund manager find investors?
This is the million dollar hedge fund question. Generally a hedge fund manager will look to friends and family and then, after the manager has established an attractive track record, the manager will try to raise assets from institutional investors. A hedge fund manager must make sure that it does not engage in any activities which may be deemed to be a public advertising or solicitation in contradiction of the Regulation D rules. For more information, please see: Hedge Fund Capital – How to Raise Assets for a Hedge Fund, Regulation D Overview.
Can a hedge fund have a website?
Yes, but that does not mean that the hedge fund or manager can use the internet to solicit clients. The manager will need to make sure that the website complies with certain requirements as laid out in SEC no-action letters. For more information, please see: Hedge Fund Websites.
What are the typical hedge fund fees?
Probably the most quoted fee structure is a 2% management fee and a 20% performance fee, however, each hedge fund will be different based on a variety of items including the investment strategy and structure. For more information, please see: Hedge Fund Management Fees, Hedge Fund Performance Fees.
Please contact us if you have another hedge fund question or need help with hedge fund formation.