Section 475 of the tax code permits certain active traders to treat all investment transactions as generating ordinary income or loss. Fund managers making a mark-to-market election recognize all gain or loss in open positions at year-end at the current fair market value as though they had been sold on December 31. By recognizing all transactions as ordinary income a fund manager forfeits the ability to treat any assets as long-term capital gains. Similarly, by marking portfolio assets to market at year-end, a manager loses the ability to defer income to later years.
After the initial seed raise, many issuers find it difficult to locate sufficientaccredited investors to participate in the offering and turn to intermediaries. When using intermediaries, a company must (unless conducting a Rule 506(c) offering) ensure that the intermediaries follow the rules requiring substantive pre-existing relationships with any prospective investors, and avoid general advertising and solicitation.
Successful hedge funds rely heavily on the intellect and expertise of key individuals, the loss of which can prove ruinous to hedge funds of all sizes. In November 2014, one of Europe’s largest money mangers, BlueBay, had to close a $1.4 billion fund because of the departure of a single key fund manager.
As part of the hedge fund formation process, the attorney works closely with the fund sponsor to craft the terms to which the fund and its investors will be bound. When properly structured, hedge fund offering documents contain terms that adequately protect the fund sponsor and are attractive to investors.
On September 23 of last year, the SEC adopted rules allowing private issuers of securities, including hedge funds, to engage in advertising and general solicitation under Regulation D. Until the recent CFTC announcement, hedge funds that include commodities or futures within their portfolios could not engage in general solicitation, since such instruments are regulated by the Commodities Futures Trading Commission (CFTC).
Hedge fund strategies encompass a broad range of risk tolerance and investment philosophies within a wide array of investments, including debt and equity securities, commodities, currencies, derivatives, real estate and other investment vehicles. The horizon of hedge fund investment strategies has seen unprecedented expansion in recent years.
A team of experienced and committed hedge fund lawyers play a vital role in guiding hedge fund managers through their various responsibilities and helping managers avoid devastating mistakes.
Choosing the right legal team can mean the difference between an emerging hedge fund’s success or failure.
A prime broker is a central broker through whom the fund executes most or all of its trades and who typically acts as custodian to the fund’s assets. When the hedge fund executes trades through other brokers, the prime broker works with the executing brokers to settle and transfer all assets through the prime broker.
Your hedge fund attorney will prepare five core documents, which are necessary to launch the fund:
(i) a private placement memorandum, (ii) limited partnership agreement, (iii) subscription agreement, (iv) investment management agreement, and (v) management company operating agreement.
Not all hedge funds are subject to investment advisor registration. To determine whether a fund needs to register, we ask our clients the following four questions:
1. Will the fund invest in “securities?”
2. What will be the size of the fund?
3. In what state is the fund management team physically located?
4. In what states will the investors be located?