Starting a hedge fund not only requires working out what kind of investment strategy you’ll use, but also the particular way in which your hedge fund will be structured.

There are broadly three types of documents that you will need to start a hedge fund:

  • Fund-related
  • Regulatory-related

Fund Formation & Legal documents:

There are 4 documents central to the fund formation process. The particular documents required depends on the type of structure used: Corporation or Partnership.

  • I) Corporations: Private Placement Memorandum, subscription document (non-voting participating shares), investment management agreement - Constitutional Documents: Memorandum of Association and Articles of Association are tailored to the specifics of each fund.
  • II) Partnerships: Private Placement Memorandum, Limited Partnership Agreement, subscription document (as a LP), investment management agreement

Private Placement Memorandum (‘PPM’):

A PPM is a key hedge fund document that provides material information about the fund to the investor and discloses key information about the fund.

Specific information about the terms of the offering, the structure of the investment, the background of the fund manager and statutory & commercial disclosures. Investors will make a decision about choosing whether to invest in the fund based on the PPM, alongside other supplemental documentation provided.

For smaller funds, term sheets are used in lieu of PPMs.

The key parts of a PPM include (but is not limited to):

  • Executive Summary
  • Investment objective & strategy
  • Management & governance
  • Summary of the key terms, information on fee structure
  • Risk factors, such as factors specific to the fund, the asset classes it invests in (For example, specific disclosures about risks stemming from holding cryptocurrencies), the strategies it will employ, and other foreseeable risks.
  • Details about custodians used.
  • Hedge fund structure & entity information
  • Disclosure of potential conflicts of interests.
  • Methodologies used for investments
  • Service providers that the fund will use
  • Investor qualification & thresholds.

Limited Partnership Agreement (‘LPA’): For Partnerships>

Certain offshore hedge fund structures include a Limited Partnership as part of its structure. In such scenarios, a limited partnership agreement is used as a key constitutional and governance document for the fund.

The LPA specifies the rights & obligations of the investors and the fund manager, and regulates the relationship between the investors and the fund manager. The manager acts as a General Partner (‘GP’), while investors are Limited Partner(s) (‘LP’).

The key parts of a LPA include (but is not limited to):

  • Key Terms
  • Management/Governance
  • Fee structure (Including calculation methodology and payment), expenses and tax considerations
  • Asset valuation methodology
  • Fund closing, capital calls, reporting.
  • Transfer requests
  • Method for allocating and distributing profits to partners, timings of redemptions
  • Withdrawal provisions
  • Employee-related sections (Including ‘key man’ clauses)
  • Power of Attorney (authorising GP to act on LPs’ behalf
  • Liability limitation and indemnity section.

Subscription Documents & Investor Questionnaire:

The subscription agreement sets out the terms that the investor will be investing as a Limited Partner or as an investor holding non-voting participating shares in the fund.

In addition to the terms, the investor will make representations and warranties in the subscription agreement, which will include his/her compliance with the suitability tests (Status as an ‘accredited investor’ or as a ‘qualified client’.).

Most offshore hedge funds rely on certain exemptions as part of their structure. Investor questionnaires are used to gauge and confirm the investor’s eligibility and suitability as a LP/investor of the fund.

Investment Management Agreement (‘IMA’):

In a hedge fund structure, a investment manager is appointed by the fund to manage the hedge fund’s assets. The Investment Manager can be set up both onshore and offshore. In certain cases and jurisdictions, an offshore structure may reduce the level of regulation that the Investment Manager is subject to.

The IMA is used to regulate the contractual relationship between the fund and the investment manager. It crucially grants the investment manager power of attorney over the fund assets, giving the investment manager broad authority to handle the investment funds.

The key parts of an IMA include (but is not limited to):

  • Scope of discretion
  • Fee & compensation structure
  • Power of attorney granted to the investment manager
  • Disclosure of potential conflicts of interests.
  • Representations and warranties
  • Liability limitation and indemnity section.

Regulatory documents & jurisdiction-specific filings:

There are certain regulatory documents that need to be completed and filed with national regulators and associates as part of the fund formation process. For offshore hedge funds, this tends to be specific to the jurisdiction that the fund is based in.

Cayman (CIMA):

Mutual funds established in the Cayman Islands are regulated by the Cayman Islands Monetary Authority (‘CIMA’).

Documents that need to be completed and filed with CIMA include (but is not limited to):

  • Offering Memorandum: This document provides an overview of the hedge fund’s offering document (including information on investment objectives & restrictions, risk factors, frequency of valuations, shareholder issues & redemptions and base currency).
  • Form MF1: Application for registration of a regulated fund under s.4(3) of the Mutual Funds Law.
  • Certified copy of constitutional documents: Memorandum of Association & Articles of Association, share subscription agreement, board resolutions.
  • CIMA affidavit: Affidavit of director in relation to the online filings.
  • Consent letters: Auditor and administrator
  • Certified copy of fund’s Certificate of Incorporation

Funds that fall under s.4(4) of the Mutual Funds Law are not regulated by CIMA. To compare s.4(3) and s.4(4) funds, navigate to the home page and use the flow chart fund builder.

BVI (BVI FSC):

Funds established in the British Virgin Islands are regulated by British Virgin Islands Financial Services Commission (FSC).

The documentation necessary for launching a BVI depend on the particular type of fund it is. Private, Professional and Public funds have more requirements on the documentation side, whereas the incubator and the approved fund are lighter on documentation.

Documents that need to be completed and filed with FSC include (but is not limited to):

  • Offering Memorandum/Summary of Terms
  • Subscription agreements
  • Application Form
  • Business Plan/Written Description of Investment Strategy:
  • Consent letter: Auditor (for Professional Funds)
  • Certified copy of constitutional documents
  • Certified copy of fund’s Certificate of Incorporation

2C) US (SEC, CFTC):

Offshore hedge funds with a US onshore element may be able to utilise the Regulation D exemption.

Rule 506 gives certain securities issuers (such as hedge funds) an exemption from federal exemption, where a Form D notice is filed with the with the SEC (and with individual states where applicable).

In certain cases, the investment manager of the hedge fund may be required to register as an investment advisor.

Hedge funds that deal in commodities, futures and swaps may fall under Commodity Futures Trading Commission (‘CFTC’) jurisdiction. If a hedge fund doesn’t fall under the de minimis exemption, the fund will be required to register with CFTC.