A business plan is the document that owners, business partners and financial sources want to see when you are starting your company. You should take the necessary time to work through your business model, estimate the gross revenues, general operating expenses, infrastructure needs and staffing.
A business plan is a road map for your business and should describe your business while answering fundamental questions about where you are going, how you plan to get there and whether you can succeed. The business plan may be amended as you move forward, and as you encounter new opportunities consider how those opportunities fit into your plan.
Before picking any Primary Service Provider, you’ll want to make sure the representative firms have the following characteristics:
The key determinant used in establishing the correct structure for a hedge fund or private equity fund is determined by the geographic location(s) of the Fund’s initial investors. For example, a Fund that will be structured to accommodate US-only investors will be set up differently than a Fund structured to accommodate Non-US investors.
There are generally four (4) types of Fund Structures that are used by Investment Managers:
This can be structured as a Limited Partnership (LP) or a Limited Liability Company
(LLC) and is created to accommodate investors that reside in the United States.
This can be structured as a Corporation or a Partnership and is created to accommodate investors that reside outside of the United States and US-Tax Exempt investors. The Fund is often organized in a tax haven jurisdiction which may include, but not be limited to: Cayman Islands, British Virgin Islands, Bermuda, etc.
This allows for US-Only, US-Tax Exempt and Non-US investors to invest in the same fund structure. Traditionally, the US-Only investors enter the Fund through the Domestic Feeder and the US-Tax Exempt and Non-US investors enter the Fund through the Offshore Feeder. This structure creates efficiency to the Investment Manager by allowing them to manage only one (1) pool of capital versus multiple pools.
This structure allows US-Only, US-Tax Exempt and Non-US investors to invest with the Investment Manager separately. The Domestic Fund and the Offshore Fund are run as “parallel” or “side-by-side” with each other and attempt to allocate trades on a pari passu basis. Given the separation of the two (2) funds, there is often slippage between the Funds given their different size and representative fund expenses.
In addition to formation of the hedge fund or private equity fund structure, you will be required to organize the General Partner (GP) and Investment Manager (IM) entities. Often organized as Limited Liability Companies (LLC), the GP engages the Investment Manager through an Investment Management Agreement (IMA) to manage the Fund. The IM is paid the asset based Management Fee (e.g. 1%-2%) and the General Partner is allocated the Incentive Fee. (e.g. 20%) Each entity will need to have an Operating Agreement drafted and negotiated amongst the Founding Partners.
When structuring your Fund Offering Documents, there are a number of considerations to make when determining the Fund Terms. Some of those terms are described in more detail below:
This will be the minimum investment amount that you will accept from any new investor in the Fund. (e.g. $1,000,000) Keep in mind, your fund’s Private Placement Memorandum (PPM) will often contain language that allows investors to become a Limited Partner in the Fund for a lesser amount than the stated minimum at the “General Partner’s discretion”. As a new launch, you will often accept lesser initial investments from accredited investors to gain their trust and build a track record in the hopes of receiving a larger allocation.
This determines how often you will accept new investors into the Fund. It is generally accepted that subscriptions will be accepted on a monthly or quarterly basis.
- There are two (2) types of lockups that are generally used by Investment Managers, they are a Hard Lockup and a Soft Lockup.
This is an agreement between the Limited Partners and the General Partner that the Limited Partner(s) will not have the ability to withdraw partial or the full amount of their Capital Account prior to a minimum lockup. (e.g. 1 year)
This is an agreement between the Limited Partners and the General Partner that the Limited Partner(s) will have the ability to withdraw partial or the full amount of their Capital Account within the Initial Lockup Period (e.g. 1 year). If they do so, they will often have to pay a penalty on the amount of capital redeemed (e.g. 3%). Given the turmoil in the global capital markets in 2008, and the subsequent “gating” or “suspension of redemptions” of investor capital by many large hedge funds, investors have demanded that more favorable terms be provided by their hedge fund managers. Investors would rather pay a small penalty and know they can redeem their money versus being gated.
is a notice period which requires the Limited Partner to give written notice to the Investment Manager indicating their intent to redeem a partial or full amount of their Capital Account from the Fund. Traditionally, a redemption notice is 30, 45, 60, 90 days prior to a redemption period.
is a period for which the Investment Manager is allowed to close out positions in an orderly fashion so as not to disadvantage the remaining Limited Partners to accommodate the redemption of a partial amount or full amount of a Limited Partner’s capital account. Traditionally, redemption provisions are often a monthly or quarterly time period. Coupled with the redemption notice, the redemption provision could read “Quarterly with sixty (60) days prior written notice”.
Redemption Provisions should be carefully crafted and based primarily on the average holding and disposition periods for securities in the investment strategy. Given the turmoil in the global capital markets in 2008, investors have demanded more favorable terms be provided by hedge fund managers.
This is a restriction placed on a hedge fund limiting the amount of withdrawals from the Fund during a particular redemption period. The “gate” is predetermined by the Investment Manager and is fully disclosed in the PPM. The purpose of the gate is to prevent a “run on the fund”, which could cripple its operations, as a large number of withdrawals from the Fund would force the manager to sell off a large number of positions. A gate is much less severe than a Suspension of Redemptions.
This is an asset based fee expensed on a monthly or quarterly basis. Traditionally, Investment Managers have charged an annual management fee between one percent (1%) and two percent (2%) of Assets Under Management.
The Incentive Fee is a performance based fee that is a percentage of realized and unrealized gains of the Fund’s assets payable on an annual basis. Traditionally, Investment Managers charge a twenty percent (20%) incentive fee to investors in addition to the Management Fee.
During the prelaunch stages, you will work closely with your Audit & Tax Firm along with your Legal Counsel to review and assist in the formation of the Fund’s partnership agreement and private placement memorandum.
Among others, the following services will be provided by your Audit & Tax Firm:
In choosing a Fund Administrator, you will want to choose a firm that has a breadth of experience in working with all types of investment strategies and can service different asset classes on a global basis. Advanced Fund Administration provides a comprehensive and cost effective, turnkey solution for new launch managers including, but not limited to:
A new hedge fund manager should consider the following characteristics of a prime brokerage firm:
Many new launches are often constrained by working with the large prime brokers due to smaller asset base, so many new launches obtain high quality prime brokerage through an introducing broker (IB) relationship. The IB introduces hedge fund managers to the custodian(s) and provides the middle/back office roles on behalf of the custodian. The hedge fund’s securities remain at the custodian where they provide custody, clearing and execution of trades. Because the IB aggregates accounts on behalf of the Custodian, the large minimum levels often required by the large prime brokers do not come into play. Often a hedge fund manager can become “multiprimed” at a small asset level to adhere to “best practices” often required by institutional investors.
Depending upon your investment strategy, you may require your prime broker to provide securities lending across many different asset classes and geographies.
Depending upon your investment strategy, you may require various types of financing to achieve your objectives. You will want to choose a prime broker that has knowledge and experience in these areas and is capable of providing the type of financing you require.
The prime broker should have an online portal where all of your trade data is captured and provides robust portfolio analytics and reporting. Ideally, the portal should have the ability to gather trade files from all prime broker/custodial relationships so aggregated reports can be produced to calculate performance and risk analytics.
Your prime broker, through their online portal and/or real-time technology, should be able to provide Profit & Loss, Performance Attribution and Risk Analytics.
Depending upon your investment strategy, you may require an Electronic Trading model or a full-service Outsourced Trading desk. It is important that your prime broker has a robust offering of both Electronic and Outsourced Trading across multiple asset classes.
Your prime broker should be able to provide multiple Execution Management systems (EMS) that encompasses trading across multiple asset classes on a global basis. There is not a “one size fits all” and having options to choose from should provide the right solution.
Your prime broker should be staffed with professionals that understand your business and can implement solutions across all of the key areas of your business. Solutions should not only address current issues, but also be scalable if your successful in executing your business plan and grow to a larger size.
Your prime broker should be “right sized’ to meet your needs as a new launch and as you grow and become a large hedge fund with multiple custodial relationships.
Once the Primary Service Providers have been chosen, you will then move on to the Secondary Service Providers that, in many cases, will provide equally important services as your primaries.
AFA can provide outsourced compliance solutions for your firm. Engaging a high quality outsource compliance firm can assist in developing and maintaining a compliance program for your firm that is in line with “Best Practices” for the hedge fund industry. Even if you are not required to register with the SEC or State Regulatory Body, it is a generally accepted best practice to manage your business with a “Culture of Compliance” and have many of the components in place as if you were registered. Some of the key benefits you receive from working with an Outsourced Compliance Consultant are outlined below:
Identifying a high quality outsourced risk management firm will help you protect and grow assets, obtain a higher level of trust from investors, and manage risk for your fund. Some of the key areas that an outsourced risk management firm would provide would be:
AFA has partnered with a global insurance broker to provide a variety of insurance products, which may include, but not be limited to:
Engaging a high quality outsourced Human Resource Department or Professional Employer Organization (“PEO”) allows you to focus on your core competencies and provides administrative relief from many employer-related responsibilities, so you can concentrate on your Investment Strategy, which is what provides you with your competitive advantage.
AFA has partnered with TriNet to offer outsourced Human Resource Solutions for payroll, benefits, and workers compensation. TriNet is a leading Professional Employer Organization (PEO) offering outsourced HR services to more than 8,000 clients and 200,000+ employees across all 50 US States and Canada. The benefits realized by TriNet clients include: (1) cost containment surrounding health benefits and minimize year-over-year increases; (2) delegation of complex administrative tasks allowing fund managers to focus on portfolio performance and raising capital; and (3) ensuring clients are fully compliant and prepared to address the challenges of changing regulations. TriNet HR services include:
Information Technology (IT) will play a major role during prelaunch and throughout the lifecycle of your business. IT Managed Services should be designed specifically to enable financial firms to manage their security requirements and regulatory compliance, and to securely provide their financial products to their clients and investors. Some of the services may include:
should provide redundant, firewall protected, high speed, managed communications services to leading Market Data providers and the Internet
should include a “highly available” encrypted e-mail platform (with spam filtering), multiple file sharing servers, server and workstation monitoring and maintenance, and an IT Help Desk that is available whenever you need them
should include hosted VoIP phone service, allowing managers to work from anywhere with an Internet connection
plans are tested periodically for accuracy and allow managers to “check the box” on their due diligence questionnaires (‘DDQs’).
provides a library of pre-installed applications designed specifically for the financial industry, connectivity to 3rd party providers, and virtually unlimited computing power that can scale on-demand. Cloud computing is a virtual and outsourced modular platform that allows financial clients the ability to adopt state-of-the-art technology with the confidence of industry best security and compliance. Applications and data are available anywhere, anytime and from any computer or device that can access the Internet.
Looking for office space can be a time consuming process, and you will have to determine whether you require a physical office or virtual office presence. To determine your space needs, you’ll want to consider (a) how many employees you’ll have at launch and also one (1) year from launch if you execute your business plan; and (b) the configuration of the office (trading desk, private offices, conference room, communications closet/room, kitchenette, reception, etc.).
AFA has partnered with Regus to offer all AFA clients Physical Office and Virtual Office Solutions. With a global footprint of 1,500 locations in 600 cities and 100 countries serving over one million customers, Regus is the world’s largest provider of flexible workplaces. Products and services range from fully equipped offices to professional meeting rooms, business lounges and the world’s largest network of video communication studios, with complete receptionist and IT support. Regus offers flexible terms with no long-term lease commitments, up-front capital, or build-out costs. Clients take the amount of space they need for the amount of time they need, providing more flexibility and cost-effectiveness. Office space solutions include:
Fully furnished and equipped, with receptionist, facilities, and IT support
Provides clients with a business presence in key locations, offering a business address, telephone answering, mail forwarding, and preferred rates on offices and meeting rooms.
over 4,500 meeting rooms worldwide, allowing clients to choose from a selection of layouts and styles to accommodate client meetings and presentations, and includes assistance with catering, audiovisual equipment, and on-site support.
State-of-the-art video communications rooms allowing clients to meet with clients and investors from around the globe. Regus provides a one-step reservation process, allowing clients to select from affordable hourly, daily, or weekly rates with no scheduling fees.
Chief Financial Officer (“CFO”) - Will have responsibility of overseeing the financial functions for the general partner entities, management company, and fund(s). In addition to being responsible for the financial matters of the operating companies, the CFO will be responsible for the daily cash/position reconciliation of the fund(s). Depending upon the size of the firm, the CFO might execute this function themselves, delegate to an internal Controller with Fund Accounting expertise or outsource this function to a third party like a Fund Administrator. The CFO will collaborate with the COO to execute the overall business plan of the firm as determined by the Founding Partner(s).
Chief Operating Officer (“COO”) - Will have the responsibility of overseeing the operations for the general partner entities, management company and fund(s). This will include working with the primary and secondary service providers along with daily fund operations (e.g. trade reconciliations), marketing, and investor relations along with collaborating with the CFO to execute the overall business plan of the firm as determined by the Founding Partner(s).
An Enterprise Risk Management (ERM) review will include the review of a firm’s enterprise-wide infrastructure, reporting and governance, and recommend customized ways to enhance and align business efficiency and reporting capabilities.
ERM Solutions create compliance policies and procedures to fit a firm’s organizational structure and business goals, and meet all external regulatory requirements.
Through the course of its analysis, the ERM team will:
ERM Solutions develop tools, training material, and annual audits that fit a firm’s technology, infrastructure, and reporting requirements. The ERM team works with internal and third-party staff to oversee implementation and operation.
Implementation of technological tools:
Annual internal audit reviews:
ERM’s Document Preparation services enable firms to review and enhance external reporting processes and outputs.
Preparation and maintenance of all required reports and reconciliations:
Having a well-thought out and organized marketing strategy is a key component prior to beginning the process of raising capital. A number of factors will affect how the strategy is determined including the type of investors that a firm will target.
AFA Advisory Services provides a specific set of deliverables to managers of early stage hedge funds and private equity funds, as well as established fund managers who seek to increase Fund assets under management through development of an institutional grade product. AFA partners with its advisory clients to prepare the necessary marketing collateral and develop a detailed roadmap to navigate the various stages of fund raising. Areas of focus include:
What is your background?
What is your investment strategy?
High Net Worth Individuals
Family Offices (ultra-high net worth individuals)
Strategic “Seed Investors” and/or Incubators
Fund of Funds
Institutional Investors (Pension Plans, Private Banks, Insurance Co.’s)
A summary of the firm’s qualitative and quantitative characteristics which will include firm history, organizational chart, team member biographies, description of the investment strategy, current fund performance, prior track record of principals (if applicable), case studies (long and short), description of fund terms, service providers and risk disclosures.
A monthly summary of key characteristics of the Fund including a description of the investment strategy, monthly net performance, risk/reward analysis, peer group analysis, benchmark analysis, current AUM, service providers and contact information.
A large percentage of sophisticated allocators will request that a manager complete a Due Diligence Questionnaire (DDQ). The most widely accepted DDQ has been produced by the Alternative Investment Manager Association, known as AIMA (www.aima.org). Given the amount of information required and the necessary time to complete a DDQ, it is recommended to complete the DDQ in advance of your launch and make updates on a quarterly basis.
An investor newsletter provides investors and prospective investors an opportunity to further understand the manager’s investment process, current views on the global economy, analysis of the most recent fund performance, attribution of returns (long or short) and fund exposures. (gross exposure, net exposure, sector/industry exposure, asset allocation)
AFA Advisory provides full service web design and hosting. Proprietary to AFA Advisory, this product is designed specifically to address the operational challenges of running a Hedge Fund or Private Equity firm and to help attract and maintain institutional investors. Some of the features are: