Starting a Hedge Fund

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Topic:   Setting up Investment Company
Spencer Uresk
New Member
posted 12-30-2002 10:43 AM                 

I’m not looking for any specific advice, just trying to determine the feasability of an idea I had.
I have provided free, informal investing advice to a few friends and relatives over the past few years. Now we are looking to pool our money for investing purposes (possibly purchasing local real estate down the road also) with me running it and receiving compensation for doing so. I’ve been reviewing the Investment Company Act of 1940, but I’m not sure I totally understand all of it.
I do know that we wouldn’t count as an investment club, as most investors would be passive and I would be receiving compensation for my services. A hedge fund type setup would be out also, since only a few of us count as qualified purchasers. Is setting up a regulated investment company my only other option? I’m guessing that entails quite a bit of initial money to setup.
So, I guess my question is – What general direction would I need to go to set something like this up, and what kind of ballpark figure is it going to cost me? (ie, tens of thousand, hundreds of thousands?)
Thanks in advance for any advice.
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Mark Astarita
Administrator
posted 12-30-2002 02:04 PM              

Nice to see someone doing some research! You would be a form of a hedge fund – a private limited investment partnership.
The problem is that in order to comply with the varied exemptions, you need to do a partnership, and a private placement, all of which takes a decent amount of legal time. Then there are the accountants.
But that is the vehicle for what you are describing. The costs of doing that are going to be in the $20-$30,000 range, unless you work and find a local attorney who is willing to take on the work, and the risk, for less.
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This message is general information only, and is not intended as legal advice. Do not rely upon this message without speaking to an attorney.

 

Spencer Uresk
New Member
posted 12-30-2002 03:00 PM   

Thanks your time Mark. I tried looking up private limited investment partnerships here on the board and elsewhere, but I couldn’t come up with much, so I hope you won’t mind a few more questions (or if you know of a handy resource for them, point me to it).
a) Just to be clear – you say this is a form of a hedge fund? Does it have the same requirement for all partners to be qualified purchasers like a hedge fund does?
b) Does this form restrict the partnership to just investing? Or can other things be done with the funds, ie, purchasing real-estate or private businesses?
c) Say we want to raise more capital. Can we allow others to invest without creating problems? Or is it pretty much a closed-end deal?
The cost of $20 – $30,000 seems reasonable given the valuable services provided, and the peace of mind you get from knowing it was done properly. That would be a pretty big bite out of our starting capital though.
Thanks again for the info, I appreciate it.

Mark Astarita
Administrator
posted 01-01-2003 05:09 AM            

Hedge funds and private investment partnerships are the same thing.
Some hedge funds do limit their investors to qualified purchasers (5 million in investments) but that is done in order to meet certain registration exemptions. There is another exemption which does not contain any restriction on who the investors are.
These restrictions come from the Investment Company Act, which only requires that you keep the number of investors under 100. However, since you will be making an offering of securities when you take investments from your investors, you need to comply with the Securities Act of 1933, specifically Regulation D, which prevents you from having more than 35 non-accredited investors.
So, the short answer is, you can have less than 100 investors, with no more than 35 of them being non-accredited. Not the type of hedge fund most people want to manage, but it can be done.
Your investments can be in anything, and raising capital later is not a problem, provided the partnership is set up correctly.
Why don’t you contact me at astarita@seclaw.com and we can discuss it further.
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This message is general information only, and is not intended as legal advice. Do not rely upon this message without speaking to an attorney.

 

This is a general discussion forum, and information posted here is not legal advice. The law varies from state to state, and with different factual situations. Be sure to discuss legal matters with an attorney retained by you before making a legal decision.

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