posted 05-05-2003 02:23 PM                  

A bit background: I am an engineer turned senior manager in the high-tech industry, looking to develop an alternate career in financial services. I am exploring two options – set up shop as an investment advisor/financial planner or run a hedge fund, initially with my own money + some friend's and in the future, perhaps, expand to others.

Based on my research, here is what I understand.

As an Investment Advisor, I need to register in the states I want to practice. Because I will have less than $25M in assets under management, I do not need to register with SEC. Registration with states involves Series 65 exam and registration forms/audit requirements.

As a hedge fund manager, I need proper setting up of the partnership agreements, but do not need to clear any NASD's exams or register as an investment advisor.

As an investment advisor/planner I can manage other people's money, trade their account for them, and advise them as needed on overall financial matters, including referring to other experts in specific functional areas.

As a hedge fund manager, I pool all the monies and invest them. But I am limited to getting money only from "really rich" ($1M assets or $200K income/yr) folks.

Is the above accurate?

Why the different sets of laws? In both cases I am managing other people's money and getting compensated for it. Does the fact that in one case I am managing each individual account and hopefully specific to that person's needs vs. managing a pool make the difference?

Assume (because of bad luck :-) I end losing signficant amount of monies for my clients/partners. Would the hedge fund structure protect me much better (in a legal sense) than an investment advisor? Are there other reasons to prefer the complexity of the hedge fund structure?

Additionally, is it possible to set the hedge fund in a manner that folks with assets less than 1M or annual income less than $200K can participate in the fund?

posted 05-06-2003 02:41 AM                     

Why can you set up a hedge fund without registering as an investment adviser? Because the hedge fund is considered only a single client, and the number of clients you have is one factor determining whether you have to register as an adviser. State laws vary, but typically you have to register if you have six or more clients.

You are allowed to have a limited number of investors who are not accredited (i.e., do not meet the $1m assets/ $200K income test), although many managers prefer to stick with the higher standard. You may want to apply a higher standard still and accept only investors who have a net worth of at least $1.5 million. This would allow you to continue to receive a performance fee if you subsequently register as an investment adviser. Performance fees are the main reason why advisers like to set up hedge funds - they are common with hedge funds, unusual with individual investment advisory relationships. The hedge fund does not give you any special protection in the event of losses.

Feel free to contact me directly if you have more questions.