Hedge funds are another form of Private Placement. They are simply another form of investment vehicle issued under the Regulation D provisions. A hedge fund pools capital from a number of investors and reinvests the funds in a multitude of various type asset classes. These asset classes can be stocks, bonds, real estate, currencies, promissory notes, and other instruments. These funds are often structured as a limited partnership or a limited liability company.
When structuring a hedge fund it is much like a normal private placement. The big difference is Hedge funds are primarily open-ended vehicles. This means they allow for additions or withdrawals by their investors. A hedge fund’s value can also increase or decrease depending on the market fluctuations associated with assets the fund is holding.
Hedge fund management teams typically charge their funds a management fee and a performance fee. Management fees are expressed as a percentage of the fund’s net asset value. These Management fees typically range from 1% to 4% per year. However 2% is considered standard.
Performance fees are typically 20% of the fund’s net profits during any year. However some funds have been known to charge as little as 10% and as much as 50%. Performance fees are intended to provide an incentive for a manager to generate higher profits.
Procedurally a hedge fund is much like a normal private placement. When marketing a hedge fund, just like a private placement, a Form D must also be filed with the SEC. Both hedge funds and regular private placement issuers have to file Blue Skies State disclosures as well. They both have very similar rules with respect to accredited investors an how they can be solicited.
So as you can see a hedge fund issuers and corporate issuers have much in common from a regulatory and procedural perspective.
However there may be times where it is advantageous to raise capital using a hedge fund. The open-ended nature, fee structure, and tax treatment may be reasons a business owner sees benefits in operating under a hedge fund structure verses a C-corporation or some other similar entity.
Feel free to contact us to discuss possibilities about your business going forward.