# Starting a Hedge Fund



## nizar (20 March 2009)

Hi,

I've got a few questions about starting a hedge fund in Australia.
Heaps of stuff online about the Yanks, but not much relevant to us, here.

1/ What would be the best structure to incorporate the hedge fund?
As a Limited Liability Company (LLC) or Limited Liability Partnership (LP) or something else?

2/ Alot of US hedge funds are based "offshore" like in the Cayman Islands or Bermuda, etc. Do Australian-based hedge funds do the same? In the States, I don't think it's illegal to base offshore, but here it may be??

3/ Generally, what would be the standard range of charges to get a big4 accounting firm to audit your returns? $30k p.a. ? Would this include more sophisticated auditing such as real-estate, emerging market investments, and other illiquid investments?

4/ As a hedge fund, I understand a AFS License is required. 

i) What are the minimum requirements for hedge fund investors? Are they only open to "sophisticated investors"? 

ii) How do you know if a client is "sophisticated"? A letter from their accountant? 

5/ As a hedge fund, is there any requirement/obligation to report the unit value of the fund on a basis more regular than annually? Or does anything go, as long as your investors are happy? Maybe quarterly is the minimum acceptable timeframe?

I will be speaking to an accountant about the above, but since the questions are not very specific, some answers from others on this board would be appreciated.

Thanks.


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## Gerkin (20 March 2009)

More importantly,
Why would people invest in your hedge fund???
What experience do you have??
Do you have seed capital??


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## nizar (20 March 2009)

Gerkin said:


> More importantly,
> Why would people invest in your hedge fund???
> What experience do you have??
> Do you have seed capital??




Those are undoubtedly more important I agree, but I have that covered.
It will just be a (relatively) small fund for family and friends.
Thanks for your concern.


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## YOUNG_TRADER (20 March 2009)

Gerkin pretty sure Niz wasn't asking for investors or how to get them but info on how to set one up and Niz you got me as a backer mate! 



1. For structure its all about limiting the founders and directors liability so do some research on this and seek some specialist advice however to offset this perception of hey I can't be held accountable and to inspire confidence you will have to stump up your own capital into the fund to say look my money is where my mouth is



2. Again this would require specialist tax law advice, the sole purpose of having funds set up in the grand cayman islands is to minimise tax however I'm pretty sure Aust are alot stricter when it comes to this sort of stuff

3. Your best bet to keep accounting and legal costs down is to bring an experienced accountant and an experienced lawyer on board, they will provide invaluable day to day legal and accounting expertise at a fraction of the cost of constantly outsourcing this to a top tier firm, but make sure their vision is aligned with yours, ie guys your not here to make money but rather to help grow a hedge fund

4.  Stick to only high net worth Sophisticated investors, yes technically to be a sophisticated investor you only need your accountant to sign off on a 7 and 8s form (Corps Act) but as a rule I would suggest you stick to high net worth individuals ie those worth over say $10M not including primary residence, these poeple tend to be less concerned with a $100k investment and your much better off having say 50 people back you with $100k - $250k each then say 500 people back you with $!0k - $25k


5. This all depends on your prospectus and company/hedge fund constitution I would have thought, given you are unlisted it would be tiresome and annoying to have to constantly mark to mkt your funds unit value, again alot of this relates to what your investors would want so sticking to high net worths who aren't to concerned with daily fluctuations is the best way to go


I personally know a group of lawyers, bankers and accountants that have started a VC fund, so once you get further along would be happy to introduce you to them so you can see the real nuts and bolts of getting something like that off the ground, especially in these mkts.


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## Temjin (20 March 2009)

Hey Nizar,

Remember when I mentioned about being a CTA (Commodity Trading Advisor)? Search the internet for info regarding them and you will understand some of the requirements.

As for tax / accounting related issues, I would suggest you talk to those people you just mentioned. And for the ASF license, I THINK it is only applicable if you intend to operate the fund in Australia and sell the products to local citizens. But I'm not too sure on this one. Most hedge funds are started off shore anyway and is DEFINITELY not because of tax minimisation (it's tax avoidance if you are a resident of Australia, u need to report all income anyway) It's to do with asset protections and other complex law stuff. 

Let me know what you find out.  Thanks.


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## Gerkin (20 March 2009)

nizar said:


> Those are undoubtedly more important I agree, but I have that covered.
> It will just be a (relatively) small fund for family and friends.
> Thanks for your concern.




Its not everyday someone asks how to set up a hedge fund on a stock discussion forum. Most people setting these up would already be well placed in the industry to know how to do such a thing.

In regards to point two. Look at a unit trust structure in the Cook Islands. I know some very successful Australian Hedge Funds set up their, and their tax laws allow hedge funds to pay no income tax, but keep profits within the UT.


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## nizar (20 March 2009)

YOUNG_TRADER said:


> Gerkin pretty sure Niz wasn't asking for investors or how to get them but info on how to set one up and Niz you got me as a backer mate!
> 
> 
> 
> ...




YT thanks for your thoughts brother.
I will be in touch with you through Nosh in the coming weeks.


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## Timmy (20 March 2009)

Geez Nizar - I guess you found that George Soros article pretty inspiring eh?


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## nizar (20 March 2009)

Gerkin said:


> In regards to point two. Look at a unit trust structure in the Cook Islands. I know some very successful Australian Hedge Funds set up their, and their tax laws allow hedge funds to pay no income tax, but keep profits within the UT.




Thanks Gerkin I will look into it.

Timmy - Haha, yes it was a good article.


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## CanOz (20 March 2009)

Nizar, for a tax return from PWC, it costs about 2500 AUD.

Cheers,


CanOz


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## nizar (21 March 2009)

CanOz said:


> Nizar, for a tax return from PWC, it costs about 2500 AUD.
> 
> Cheers,
> 
> ...




Tax return??  
I was asking about auditing.....


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## doctorj (21 March 2009)

Why do you need a big4 firm to audit it if you're just going to family and friends?  

If you really intend to launch a fund in this climate, good luck!
Work on an average fee (ex) if $400-500 per hour of work for big4.  If your documentation and record keeping is up to standard it will obviously reduce the time/cost. It's also dependant on the number of transactions and whether you need them to audit your AFSL while you're there.  $30k pa is probably a reasonable start.

Lets say you're lucky and you can raise $1m from family and friends, you're going to have to make 3% returns after trading-related costs and other overheads to cover your audit fee...


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## CanOz (21 March 2009)

nizar said:


> Tax return??
> I was asking about auditing.....




I was trying to give you an idea....how many individuals do you think PWC audit each year???

CanOz


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## nizar (21 March 2009)

doctorj said:


> Why do you need a big4 firm to audit it if you're just going to family and friends?
> 
> If you really intend to launch a fund in this climate, good luck!
> Work on an average fee (ex) if $400-500 per hour of work for big4.  If your documentation and record keeping is up to standard it will obviously reduce the time/cost. It's also dependant on the number of transactions and whether you need them to audit your AFSL while you're there.  $30k pa is probably a reasonable start.
> ...




Doc thanks for your thoughts.

There will obviously be other fees not just the audit fee and I realise that.
And the "launch" will not be in this climate.
But I figure I would need to start audited returns on this strategy now if I want to have an audited 5-year track record to show to potential investors.

Lots of anecdotal evidence that big money can be made showing the strategy I plan to employ for this initial fund.

As for investors, it will be very very exclusive and there will be a maximum allowable investment to give everyone (from family a friends) a fair chance.

Though I said it would be a small fund, I plan on raising a fair bit more than $1million.

Can.

Cool I can see your point now thanks.


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## prawn_86 (21 March 2009)

nizar said:


> Lots of anecdotal evidence that big money can be made showing the strategy I plan to employ for this initial fund.




So does that mena big money made for you or big money made for the investors in your fund?


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## nizar (21 March 2009)

prawn_86 said:


> So does that mena big money made for you or big money made for the investors in your fund?




Both.
My family will hold a 5-10% stake in the fund.


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## Naked shorts (21 March 2009)

Start your fund in Singapore, maximum allowable tax is 21%. There is a street in Singapore, next to china town where a whole bunch of the big-name anglo-saxon-run hedge-funds are based. Just because your fund is based in singapore, doesnt mean that you need to live their either.


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## Naked shorts (21 March 2009)

Oh I also agreed with you on getting you returns audited by one of the big four. A lot of investors have been quite shaken up by the recent frauds in the industry, so the more creditable your auditing organisation is the better.


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## nizar (21 March 2009)

Naked shorts said:


> Start your fund in Singapore, maximum allowable tax is 21%. There is a street in Singapore, next to china town where a whole bunch of the big-name anglo-saxon-run hedge-funds are based. Just because your fund is based in singapore, doesnt mean that you need to live their either.




Thanks, I will look into it.


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## nizar (22 March 2009)

I like.



> We act for local and offshore fund operators, fund investors and fund service providers. We have extensive international and regional expertise.
> 
> We understand fund structures in various overseas jurisdictions (Cayman Islands, Delaware, Luxembourg etc) and provide a focused, solutions based approach to offering foreign funds in the Australian market and to those establishing and investing in international private equity, wholesale and retail funds.




http://www.mallesons.com/expertise/funds_management/5541919W.htm


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## Naked shorts (22 March 2009)

nizar said:


> I like.
> 
> 
> 
> http://www.mallesons.com/expertise/funds_management/5541919W.htm




Hahah, you might be able to squeeze these guys to give you better prices. I've been reading on the news recently about Australian companies reducing their use of outsourced lawyers/advisors. Even the government is reducing their use of these companies.


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## nizar (23 March 2009)

Ok I've been looking at existing hedge funds and their structure and came across these guys:

http://www.basiscap.com.au/basiscap_aust-rim.htm

Now going off the "Fund Structure" section on the above link, I can understand why you need lawyers, accountants, and an administrator, but why would you need BOTH a "register" and an "administrator" ?

It seems what Registries are doing is pretty much what an administrator would do:



> Processing daily cash / wrap applications and redemptions
> Banking monies, reconciling bank accounts
> Producing acknowledgement and confirmation letters and holding statements,
> Ongoing Day to day maintenance of the register - processing unitholder transfers, changes of address, distribution payment instructions, DRP election, recording TFN details, notation of probates and Powers of Attorney.
> ...




Taken from: http://www.registries.com.au/unlisted_securities.html

What would an Administrator do in addition to whats already being done by Registries?

And also, why would they have an "Auditor" in addition to "Accountants" ?

Is this so they only get E&Y to do audits and the Accountants to do the other general day-to-day stuff? An attempt to cut costs instead of getting E&Y to do the lot?

Lastly, what is the purpose of having a Custodian?
So does the custodian holds (owns??) the assets of the fund?

Can anybody expand?

Thanks.


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## skc (22 June 2009)

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I can't remember signing up for it so it could be spam... so as always DYOR.

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## gooner (22 June 2009)

nizar said:


> Hi,
> 
> I've got a few questions about starting a hedge fund in Australia.
> Heaps of stuff online about the Yanks, but not much relevant to us, here.
> ...




Nizar,

My understanding as follows, but not an expert in all the areas:

1 and 2. If investors are Australian residents, then there are no advantages to an offshore fund structure. Australian funds pay 15% tax, I think and must distribute all realised profits to investors. There are funds managed in Australia that are Cayman registered - for the benefit of offshore investors not Australian ones.

3,4,5 - no idea

And on your auditors vs accountants question, they MUST be different. It is a breach of audit independence requirements to audit accounts that have been prepared by the same firm.


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## dasmith1973 (22 June 2009)

Hi Nizar, have a friend in Brisbane who started a hedge / investment fund this year, can't comment on structures, but I remember he had a number of startup costs & compliance issues.  For a public fund you need various licencing & overviewing managers as per ASIC.  Luckily he had a backer to get started.

If its just for family/friends why not just keep it private thru a trust & company & create individual legal agreements or do you still run into legal issues that need asic compliance?

I can pass on the following direct comments from his recent experience:

-	Licensing costs a lot (in excess of 50k by the time I’m done)
-	Not getting licensed is a serious offence, and the penalties are very harsh – potentially jail time.
-	Responsible managers (requirement by ASIC) cost a fortune
-	Spend at least 3 – 6 months learning about operating in a compliant way... no matter how much money you make for your investors, if you aren’t compliant with ASIC regulations.... which is inherently easy to do for a person that hasn’t worked in the industry, then you are likely to run into serious legal problems.

Hope that helps..
Chrs, Dave


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## Temjin (22 June 2009)

Another easier way is to skip getting an ASIC license and only setup an offshore company and only allow NON-AUSTRALIAN INVESTORS. 

That's my belief anyway because offshore hedge fund companies operated by non-Australians DO NOT REQUIRE an ASIC license to sell their service to Australian investors. 

But of course, I could be wrong and that essentially means this country is a crappy place to start a hedge fund at all. I suggest moving oversea with less compliance requirement.


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## Sirloin Steak (7 April 2010)

Im also interested in starting a hedge fund.
My reason for this is that I have found arbitrage and equity opportunities that I need more capital to utilise.
Do I need any official qualifications in order to get a license?
If initially Im only going to need 1-2 million then will the costs involved in hiring reputable auditors outweigh the potential benefits?
I would prefer to register in Australia so that my investors can see a higher level of integrity but will it be too expensive and difficult for the amount of capital I want?


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## doctorj (7 April 2010)

Surely a fund that small would be sub-scale for the overheads required to support a fund (one of which is obviously audit fees).


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## MRC & Co (7 April 2010)

Over a year later now, hows that fund coming along?


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## Naked shorts (7 April 2010)

Sirloin Steak said:


> Im also interested in starting a hedge fund.
> My reason for this is that I have found arbitrage and equity opportunities that I need more capital to utilise.
> Do I need any official qualifications in order to get a license?
> If initially Im only going to need 1-2 million then will the costs involved in hiring reputable auditors outweigh the potential benefits?
> I would prefer to register in Australia so that my investors can see a higher level of integrity but will it be too expensive and difficult for the amount of capital I want?




would probably be better to start at a prop


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## RazzaDazzla (19 May 2010)

Damn, just wrote a detailed reply and it didn't post.

In summary, very curious to hear how Nizar and others have progressed.

Would love to know if there is official requirements put in place by ASIC or other relevant bodies.

What are estimated costs to get fund/CMT setup and ready to start looking for investors?

Very interesting thread.


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## RazzaDazzla (11 June 2010)

The fund must be a raging success and he's now on his Yacht... Or a flop and he's running from angry creditors!


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## professor_frink (11 June 2010)

Razza,

You won't find nizar posting here these days, he's no longer a member. He has a blog that he set up when he first started trading his system,

http://thetrendfollower.blogspot.com/

Doesn't get updated much these days though. As far as I can tell, he's still trying to claw his way out of a massive drawdown.

Can't imagine he'd have set up a fund or anything like that. You'd  think that any investors would want to see him turn a profit before they invested with him


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## RazzaDazzla (14 June 2010)

Thanks for the heads up Frink


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