FORMING AND OPERATING A HEDGE FUND - A Guide for Emerging Fund Managers 1 FORMING AND OPERATING A HEDGE FUND A Guide for Emerging Fund Managers By John S. Lore, Esq. © 2015 Capital Fund Law Group 2 FORMING AND OPERATING A HEDGE FUND - A Guide for Emerging Fund Managers FORMING AND OPERATING A HEDGE FUND - A Guide for Emerging Fund Managers 3 ABOUT THE AUTHOR ................................................................................................................................... 7 D. Investment Management Agreement ......................................................................................................... 20 E. Management Company Operating Agreement .......................................................................................... 20 ABOUT CAPITAL FUND LAW GROUP ...................................................................................................... 9 F. Form D Filings, Investment Advisor Registration ...................................................................................... 20 A. Our Services ................................................................................................................................................. 9 IV. COMMON HEDGE FUND STRATEGIES ........................................................................................... 21 B. Our Philosophy ............................................................................................................................................ 9 A. Long/Short Equity ..................................................................................................................................... 21 INTRODUCTION ............................................................................................................................................ 11 B. Credit Funds ............................................................................................................................................... 21 i. Distressed Debt ...................................................................................................................................... 21 Part I ............................................................................................................................................................... 11 ii. Fixed Income ......................................................................................................................................... 21 Part II ............................................................................................................................................................. 11 C. Arbitrage .................................................................................................................................................... 22 Part III ............................................................................................................................................................ 11 i. Fixed Income Arbitrage.......................................................................................................................... 22 Glossary .......................................................................................................................................................... 11 ii. Convertible Arbitrage ............................................................................................................................ 22 iii. Relative Value Arbitrage ....................................................................................................................... 22 PART 1: HEDGE FUND FORMATION BASICS iv. Merger Arbitrage .................................................................................................................................. 22 D. Event-Driven ............................................................................................................................................. 22 I. AVOIDING POTENTIAL LIABILITY..................................................................................................... 13 E. Quantitative (Black Box) ............................................................................................................................ 23 F. Global Macro .............................................................................................................................................. 23 A. Improper Offering Document Preparation Could Result in Fraud Violations ........................................... 13 G. Multi-Strategy ........................................................................................................................................... 23 i. Liabilities for Violating Federal Anti-Fraud Provisions ......................................................................... 13 ii. Liabilities for Violating State Anti-Fraud Provisions ............................................................................ 13 V. WHO CAN INVEST IN A HEDGE FUND? .......................................................................................... 25 B. Proper Legal Advice and Careful Disclosure .............................................................................................. 13 A. The Accredited Investor Standard .............................................................................................................. 25 II. SELECTING HEDGE FUND SERVICE PROVIDERS ........................................................................ 15 i. The Net Worth Test ................................................................................................................................ 25 ii. The Income Test .................................................................................................................................... 25 A. Legal Counsel ............................................................................................................................................. 15 B. The Qualified Client Standard .................................................................................................................... 25 B. Administrator .............................................................................................................................................. 16 C. Principals of the Fund ................................................................................................................................ 25 C. Auditor ........................................................................................................................................................ 16 CONTENTS D. Prime Broker/Custodian ............................................................................................................................. 16 VI. MARKETING A HEDGE FUND ............................................................................................................ 27 III. HEDGE FUND OFFERING DOCUMENTS ........................................................................................ 19 A. Seed Raise .................................................................................................................................................. 27 B. Using Intermediaries to Raise Capital ........................................................................................................ 27 A. Private Placement Memorandum ............................................................................................................... 19 C. Broker-Dealer Placement Agents .............................................................................................................. 27 B. Limited Partnership Agreement ................................................................................................................. 19 D. Finders ....................................................................................................................................................... 27 C. Subscription Documents ............................................................................................................................ 20 E. General Advertising ................................................................................................................................... 28 Call (212) 203-4300 or for a free consultation. click here © 2015 Capital Fund Law Group 4 FORMING AND OPERATING A HEDGE FUND - A Guide for Emerging Fund Managers FORMING AND OPERATING A HEDGE FUND - A Guide for Emerging Fund Managers 5 i. The JOBS Act Allows General Advertising for Certain Offerings ......................................................... 28 X. PROPERLY SECURING A REGULATION D EXEMPTION ............................................................. 41 ii. Lifting of the Advertising Ban for Private Placements–New Rule 506(c)............................................. 28 a. What are reasonable steps? ............................................................................................................... 28 A. Rule 506 Exemption .................................................................................................................................. 41 b. Will Advertising Be Effective in Raising Capital? ........................................................................... 28 i. Federal Preemption Over State Law ...................................................................................................... 41 c. Proposed Rules Requiring Additional SEC Disclosures .................................................................. 29 ii. Reduced Risk of Losing