We ask hedge fund managers five main questions to determine who can invest in their fund. Many prospective fund managers mistakenly believe that the “accredited investor” standard is the only required investor accreditation standard for their investors. Accredited investors (for individuals) must have a $1 million individual or joint net worth (excluding the primary residence), or $200k annual income ($300k with a spouse), for the previous two years, with the expectation to meet or exceed this standard for the current year.
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. Hedge fund terms are driven by a combination of the market trends and investor appetite within the fund’s specific asset class and the particular needs and objectives of the fund.
The following is a brief survey of categories of some of the most common hedge fund terms.
A Private Placement Memorandum (“PPM”), also known as a private offering document and confidential offering memorandum, is a securities disclosure document used in a private offering of securities by a private placement issuer or an investment fund (collectively, the “Issuer”). From an investor’s point of view, the purpose of the PPM is to obtain needed information about the Issuer and its securities, both good and bad, to make an informed decision about whether to purchase the security. The investor wants to know the parameters of investing in the Issuer and the potential rights, risks, and rewards of its investment. For the Issuer, the purpose of the PPM is to provide the necessary disclosures about the risks, strategies, management team, investment criteria and other information about its securities to protect itself and its managers against claims of misstatements or omissions.
Your hedge fund attorney will prepare six core documents, which are necessary to launch the fund: (i) a private placement memorandum, (ii) a limited partnership agreement, (iii) a subscription agreement, (iv) an investment management agreement, and (v) a general partner operating agreement, and (vi) a management company operating agreement.
Other services and documents that are also generally completed include the formation services of the limited partnership, the management company and the general partner; drafting the management company operating agreement; preparing and filing the Edgar registration; drafting and filing state and federal Form D notice filings; and as necessary, preparing and filing any state or federal registrations or exemptions (or other necessary fund formation documentation).
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. Hedge fund investment terms are driven in large part by the fund’s strategy and its level of liquidity. To learn more about forming and operating a hedge fund, we encourage you to read our eBook, Forming and Operating a Hedge Fund.
New York houses many of the world's largest real estate private equity funds and is among the most cities for real estate fund managers. Nearly one-fourth of the largest 100 real estate fund managers globally are headquartered in New York City (PERE June 2019 Report).
In June of 2019 we presented the Global Regulation of Digital Asset Funds, in partnership with Harneys, a leading Cayman law firm, with which we have worked extensively in structuring global digital asset funds. Our June symposium featured a panel of leading authorities on various aspects of global digital asset regulation, including securities law, taxation, and anti-money-laundering compliance.
One of the most important aspects of forming a real estate fund is to set the terms of the investment. When properly structured, real estate fund offering documents contain terms that adequately protect the fund sponsor and are attractive to investors. Real estate fund terms are driven by the fund’s strategy, the market trends within the fund’s specific asset class, and the particular needs and objectives of the fund. It is crucial that the investment fund legal counsel have an in-depth understanding of current investment market trends and how those trends affect the strategy the fund will employ.
As is the case with investment funds in general, real estate funds are trending toward higher levels of specialization. Specialization may be by asset class, strategy, or both. Examples of asset class-specific firms can include office, retail, medical, industrial, agricultural, storage, or hospitality. Real estate fund strategies can be loosely categorized into one or more of the following groups:
The early focus by the SEC and CFTC in the crypto asset space was primarily focused on preventing fraud and assessing risks to investors and the market. In cases not involving fraud, initial enforcement of digital asset investments were somewhat tempered, as regulators exercised a degree of forbearance to allow the budding industry to evolve. This period of early forbearance for digital asset market participants appears to be quickly coming to a close. Crypto asset hedge fund managers should not interpret past forbearance as an indication of current regulatory intent.
Digital asset fund managers face substantial risk in the disclosure of their investment fund strategy and have limited precedent in preparing those disclosures. As an emerging asset concept, distributed ledger technology presents a myriad of potential regulatory considerations, technological complexities, and market uncertainties with few analogous instruments. As with any fund offering disclosure, digital asset fund managers are advised to err on the side of thoroughness and caution in disclosing the breadth of the investment strategy and its potential risks.
Investment into digital assets facilitates anonymity and has the potential to be used by investors to mask various illegal transactions, including money laundering, funding of terrorist activities, and numerous regulatory violations. In addition to the AML procedures that token issuers and various intermediaries must perform, hedge funds must carefully comply with AML regulations when accepting crypto tokens from investors in lieu of fiat capital as an in-kind contribution.
The regulation of cryptocurrency fund managers is heavily dependent on how crypto digital assets are classified. In early analysis, US government regulatory bodies often categorized digital assets differently. Below is a brief overview of the various asset classifications by the SEC, the CFTC, the IRS, and Fincen, which are the US regulators most critical in governing the activities of crypto asset hedge fund managers. Note that US regulation of crypto-asset funds is in a state of flux, with a litany of regulatory issues that have yet to be resolved, and which may change over time.
In the short period from 2014 through 2019, hedge fund management and strategy has varied significantly in response to market forces. Following the significant surge of cryptocurrency funds in 2017 and 2018, there has been a noticeable trend toward increased sophistication of participating fund managers and investors.
Of the several hundred digital asset funds with managers or investors domiciled within the United States, only a minuscule portion have become fully registered investment advisers with the SEC. Instead, most of these digital asset funds have thus far avoided SEC adviser registration in one of three ways: