Starting a Hedge Fund

[nizar]

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.

 

[Gerkin]

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

 

[nizar]

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.

 

[YOUNG_TRADER]

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.

 

[Temjin]

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.

 

[Gerkin]

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.

 

[nizar]

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.

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

 

[Timmy]

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

 

[nizar]

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.

 

[CanOz]

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

Cheers,


CanOz

 

[nizar]

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

Cheers,


CanOz

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

 

[doctorj]

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...

 

[CanOz]

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

 

[nizar]

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...

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.

 

[prawn_86]

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?

 

[nizar]

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.

 

[Naked shorts]

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.

 

[Naked shorts]

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.

 

[nizar]

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.

 

[nizar]

I like.

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