Summary: Week 1

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• 1 Regulation of hedge funds

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• What is a hedge fund?

  A hedge fund is a pooled investment vehicle offered privately to high net worth individuals and institutional investors that provides its professional investment manager with flexibility to invest in a range of securities and financial instruments and to use a variety of investment strategies and techniques to seek to generate absolute returns for investors.

• What are the common characteristics of a hedge fund? (7)

  i) continuous raising of capital, ii) minimum investment, iii) invest in publicly traded securities, iv) asset based fee and a performance allocation on realized and unrealized gains above a high watermark, v) limited liquidity (lock-up possible), vi) the ability to use leverage and to engage in short-selling, vii) exempt from registration as a mutual fund under the Investment Company Act of 1940.

• Name 5 hedge fund strategies.

  Long/short stock trading, industry and country focused funds, distressed securities, emerging markets and multi-strategy.

• Who are the players in the hedge fund industry?

  Portfolio manaers, analysts and traders, ii) Cfo's, coo's, ccos and gcs, iii) institutional high net worth investors, iv) seeders, v) institutional gatekeepers, vi) prime brokers, vii) auditors, viii) administrators, iix) law firms, ix) SEC and CFTC, x) state regulators, xi) foreign regulators, xii) managed funds association.

• Which acts have to be taken in consideration according to hedge funds?

  i) SA of 1933, ii) ICA of 1940, iii) Investment Advisers Act, iv)SEA of 1934, v) Commodity Excange Act of 1936, vi) Internal Revenue Code of 1986, vii) ERISA, viii) Dodd Frank Act

• What are the primary objectives of a hedge fund structure? (4)

  i) limit liability of investors to the amount of their investment, ii) limit liability of the management companies and their owners, iii) provide tax efficiency for investors and management company owners, iv) provide hedge fund management with flexibility and authority to manage the portfolio and run operations.

• What are the advantages of using a master feeder structure? (4)

  1. ease of portfolio management and operations, 2. delivers same performance for all feeder funds, 3. allows for numerous feeder funds with different characteristics, but traded through one vehicle, 4. performance allocation at the master fund level. 

• What are the advantages of using a side by side structure? (3)

  1. less expensive, 2. More tax efficient and more flexible, 3. 3c1 fund and 3c7 fund cannot feed into one master fund.

• What are the basic hedge fund documents? (5)

  1. confidential offering memorandum, 2. limited partnership agreement, 3. offshore articles of incorporation, 4. investment management agreement, 5. subscription agreement and investor questionnaire.

• What are the characteristics of s. 3c1?

  1. Limited to 100 Beneficial owners, 2. no ipo, 3. doesn't require accredited investors, 4. excludes GP and knowledgeable employees, 5. US fund count all investors/Offshore fund count US investors only.