![]() ![]() Typically, the founder will contribute his own capital to the fund, managing it for 6 months to one-year, which provides ample opportunity for testing investment strategies and establishing a track record. In short, it is a cost effective stepping stone to launching a full-fledged hedge fund. ![]() It is the equivalent of putting a toe in the water versus cannonballing into the pool. Starting an incubator hedge fund is the sensible alternative. Oh, yes…will you choose to be a domestic or offshore fund? By the way, we have yet to touch on the implementation costs! However, most of our clients operating in the 3-entity structure get comfortable with the relative roles of the management entities such that the extra management entity does not add undue complexity on a day-to-day basis.Who among us would not like to launch a hedge fund? However, the obstacles and challenges are legion.įor example, one must develop an investment strategy or strategies, determine the structure under which to the fund will operate, secure the necessary registrations and licenses (state and federal) with applicable regulators, forge service partner relationships, craft governance and offering documentation, develop marketing communications materials, establish a marketing strategy, open bank and brokerage accounts, approach prospective investors and implement, through live trading, the fund’s strategy. These costs generally consist of the entity maintenance costs owed to the state authorities where the entity is formed or operated and the cost of tax services ( e.g., tax preparation expenses) related to the separate Investment Manager entity.īecause the separate Investment Manager operates under a delegation of authority from the General Partner, the 3-entity structure does add a bit of complexity when it comes to transacting business through the management entities, signing documents, and otherwise executing business operations. The cons of the 3-entity structure include the additional complexity and costs associated with maintaining the third entity. That is, the 3-entity structure better protects accumulated performance allocations from the Fund, since investors in separate managed accounts or in another private fund won’t have a relationship with the General Partner (which would only serve as the General Partner to a given fund).įinally, it should be said that the 3-entity structure is preferred by most large asset management organizations and, in this way, does appear somewhat more “institutional.” Cons of the 3-entity Structure Regardless of location, the 3-entity structure also offers greater flexibility in structuring equity compensation arrangements, revenue share deals, and other incentive programs with key employees, anchor investors, and strategic partners.Īlso, the 3-entity structure better segregates liabilities for investment managers with multiple product offerings. The 3-entity structure offers the potential for tax savings in New York City, Texas, and other jurisdictions that assess an Unincorporated Business Tax (“ UBT”) such that, if structured properly, UBT can be avoided on the profits of the General Partner entity. In considering whether a 3-entity structure is right for your fund setup, consider the pros and cons of the 3-entity structure described below. If you will advise separate managed accounts (in addition to the Fund) or more than one fund product, the 2-entity structure does not segregate liabilities as well as possible in the 3-entity structure, which utilizes a separate Investment Manager entity (see description of this liability concept under the 3-entity structure discussion).įinally, in jurisdictions that assess an Unincorporated Business Tax, the 2-entity structure is not as tax-efficient as the 3-entity structure. Relative to the 3-entity structure described below, the 2-entity structure does not offer as much flexibility to structure equity compensation or revenue share deals with key employees, anchor investors, or other strategic partners. It also offers cost savings in respect of lower annual expenses to maintain the management entities and lower accounting fees relative to those required for a third management entity in the 3-entity structure. ![]() The 2-entity structure offers a simple setup option with one less entity to look after. In considering whether a 2-entity structure is right for your fund setup, consider the pros and cons of the 2-entity structure described below. ![]()
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