Transcription

1

2

3

4 It is important to make sure that your fund s structure is properly aligned with your investment strategy. In order to make decisions about formation you need to know two main things: 1. What are your investments? 2. Who are your investors? Once you have answered the two main questions above you then need to consider how to properly align the fund s needs with your investors and determine which structure works best for both. Areas to be considered here are: Domicile, Structure and Tax issues. Where your investors are located is an important component to where your fund will be domiciled. Will you be marketing your strategy to U.S. Investors or Non U.S. Investors? If you will only be working with U.S. investors then you may only need one domestic fund. If you also plan to work with non-u.s. investors and or U.S. taxexempt investors then you need to consider some more options. For a single domestic fund you will establish domicile where you are establishing a place of business. You need to look closely here at state registrations. If you are establishing an office in New York, there could be issues associated with New York City s Unincorporated Business Tax. This should be discussed with your tax advisor. If you are establishing a fund with Non U.S. investors and/or U.S. tax-exempt investors, it is important to establish an offshore domicile. The most common countries in which to establish an offshore fund are: The Cayman Islands, Bermuda and Ireland. These countries are most popular for tax treaties that are established as well as having knowledgeable service providers. Knowing your investments and your investor base will be important information to share with your tax advisor during formation.

5 If you plan to target only U.S. investors, you may just need a single stand-alone fund. If you plan to market your strategy to U.S. and Non U.S. investors, then you need to consider more details. Some managers may chose to run the domestic and offshore funds as Side by Side funds. Other managers may choose a more complex structure called a Master Feeder Fund. There are advantages and disadvantages to a Master Feeder fund. There is a single portfolio at the master level, which eliminates the need to split trades daily or to engage in a rebalance of the portfolios upon capital activity into and out of the fund. If the master fund can represent that it is less than 50% owned by U.S. persons, it can obtain Reg X leverage which is higher than Reg T. Performance in the offshore fund will be identical to the performance in the domestic fund. Performance fee may be able to be treated as an allocation at the master fund rather than a fee. Offshore administrator will be involved at both the offshore feeder level and master level, so there may be additional administrative costs. There may be possible conflicts with tax agendas because it is a single portfolio (for example, a 12- month holding period would be beneficial to U.S. investors and irrelevant to offshore investors). A Master Fund may not be eligible for certain tax treaties that a U.S. entity would be eligible for. Upon formation, you will need to determine a fee structure that will work with your strategy. The most common fees that are discussed are 2 and 20. This means management fees are based on the 2% of assets under management and there is a 20% performance fee for any gains. Management fees generally range between 1% and 2%. Performance fees may range between 20% and 30% and may also be subject to specific hurdles that have to be reached in order for the manager to earn the fee. In a domestic stand-alone fund, the performance fee is generally just a reallocation of capital from the limited partners accounts to the general partner. In an offshore stand-alone fund, the performance fee will be an expense of the fund and a cash payment will be made to the designated receiving party. If a master feeder fund makes a check the box election, the entire performance fee can be treated as an allocation at the master level to the general partner.

6 Side by Side Structure Portfolio of Investments Portfolio of Investments Trades Trades Domestic Fund LP (Delaware) Investment & 20% Performance Reallocation GP LLC (General Partner of Domestic Fund) Offshore Fund Ltd. (Cayman Islands) Subscriptions Subscriptions 2% Management Fee 2% Management Fee & 20% Performance Fee Limited Partners of Domestic Fund (U.S. Individuals or U.S. Entities) Shareholders of Offshore Fund (Non U.S. or US Tax Exempt) Management Company LLC

7 Master Master Feeder Structure Portfolio of Investments Trades Master Fund Ltd. (Cayman Island) See Note 1 Investment in Master Fund Investment in Master Fund 20% Performance Allocation Domestic Feeder Fund LP (Delaware) Investment Offshore Feeder Fund Ltd. (Cayman Islands) GP LLC (General Partner of Domestic Fund and Master Fund) Subscriptions Subscriptions 2% Management Fee 2% Management Fee Limited Partners of Domestic Fund (U.S. Individuals or U.S. Entities) Shareholders of Offshore Fund (Non U.S. or U.S. Tax Exempt) Note 1: The Master Fund must make a check the box election to be taxed as a partnership for U.S. tax purposes. Management Company LLC

8 Once you determine the proper fund structure, you need to consider the appropriate set up of your Management Company. The management company is the entity that is established to receive the management fee from the funds. This fee is used to pay the overhead of running the fund (i.e., rent, salaries and employee benefits). At this stage you will consider what the anticipated cash flows in and out will be. This budget will be based on the level of assets you are expecting. You will want to set up a monthly cash flow so that you can properly align your expenses and properly build an infrastructure and team that matches your budget. It will be important to determine if the management company will be reporting on a cash basis or accrual basis. There are a lot of considerations at this point as to what kind of team you want to have in place and if you will have the cash flow to support that team. Some basic questions that need to be addressed are: Will you be the sole investment idea generator or will you be hiring analysts to assist you in the process? How will you execute your trades? Will you use a platform to enter trades or hire an experienced trader in the industry? How will you handle your Investor Relations services? Would you like to monitor this function in-house or will you be looking for a higher level service provider to provide this function? Who will monitor the accounting and financial reporting tasks? Is this a position that you will outsource until you grow? Will you bring someone in-house to perform these duties for you?

9 This function will be an integral support to your trading strategy. You need to really consider what you are trading to carry out your strategy and which service provider aligns best with this strategy. If you plan to invest heavily in corporate bond markets you will want to find a trading platform that can handle these transactions. Once you go out on your own you may be familiar with platforms that you have used at previous funds. Word of mouth works well here. Ask other funds what they are using and the benefits and detriments to the platform. Most providers of trading platforms will provide demonstrations of their system s capabilities to help you make an informed decision. You will want to find out how the data entered into these platforms interfaces with administrators systems as well. This will help ensure that the data is made available in the most usable format. Based on the staff that you plan to hire, you can now assess what kind of office space you will need to begin. It can be risky to enter into a long-term lease at this early stage of formation. Some investment managers choose to set up an incubation relationship on the onset. This allows the investment manager to establish a physical presence without having to invest heavily in furniture, IT equipment and long-term leasing costs.

10 The investment strategy is going to drive who you choose to utilize as service providers. You want to make sure that all of your service providers understand and are comfortable with your strategy. Many providers have niche markets. When performing your due diligence on these providers, be sure to find out what their sweet spot really is. These are the people who are going to be in contact with your portfolio on a constant basis, and you want to be able to utilize their expertise. Choosing the right providers enables you to focus on what you do best making investment decisions. In order to begin marketing your fund, you need to have documentation available for potential investors. This documentation is referred to as the Private Placement Memorandum ( PPM ). The PPM is a document that outlines the terms of the investment for the potential investors. This will be a very detailed document that will provide information such as: strategy, risks, liquidation, gates, and lock-up periods. It is vital to work with a lawyer who understands your investment goals so that your documents properly reflect these goals. The regulatory landscape is constantly changing, so it is vital that your legal service provider is current on compliance and regulatory matters so that they are properly reflected in your PPM. Your lawyer will also produce your subscription documents. This is the paperwork that the investors will fill out upon entering your fund. Again, you want to ensure that these are current and include all proper representations from investors. You need to determine the level of service that your fund is going to require. Some questions that need to be asked when researching an administrator are: Do you need an administrator who has the capabilities of administering an offshore fund? Will your administrator also be functioning as an outsourced Investor Relations department? Do you need your administrator to assist you with the Anti-Money Laundering procedures for new investors? Will your administrator be functioning in a Treasury role and receiving capital contributions and setting up capital withdrawals? Do you expect your administrator to prepare daily reconciliations of cash and trade activity? How frequently will you need your administrator to strike a Net Asset Value ( NAV ) for your fund? Do you need your administrator to independently provide market values for your investments?

11 There are reputable prime brokerage firms out there that are capable of servicing all levels of funds. Be sure to find the firm that works well in your investment strategy and that will make the best fit. Many of the larger firms provide their own online trading platforms, which may be beneficial to a start-up fund. Questions you will want to ask your potential prime broker: What capabilities do their trading platforms have and what kind of reporting will be available to you on a daily basis (it s important to have the ability to retrieve data to properly monitor your investments)? What kind of fees will be charged to the fund (rebate fees, custody fees, etc.)? What are the margin requirements? Will the Prime Broker be able to establish an escrow account for contributions and withdrawals? Who you choose as your accountants at this early stage is an important step in ensuring that your fund is formed in the most efficient manner. This partnership with your accountant is going to provide you with invaluable resources to enable you to provide timely report to investors as well as regulatory agencies. Partner with a firm that is current on the ever-changing regulatory landscape and can give you the best advice at every turn. If you are a fund that is registered with the SEC, be sure to engage an audit firm that is registered with and subject to inspection by the Public Company Accounting Oversight Board ( PCAOB ). ). This will help your fund to satisfy compliance with the custody rule.

12 The number one question we hear from new start-ups is do I need to register? The recent Dodd Frank legislation has brought about some changes in this requirement. Recently, the SEC extended the filing deadline for new funds that need to be registered until March 30, The two things that determine if you need to register are: assets under management and the state in which you are doing business. Excerpt from the SEC website: An adviser with assets under management of between $25 and $100 million must register with the SEC if: The adviser is not required to be registered as an adviser with the state securities authority in the state where it maintains its principal office and place of business; or Is not subject to examination as an adviser by the state where it maintains its principal office and place of business. Currently, the states of Wyoming and New York are states where an adviser with assets between $25 and $100 million would not be subject to examination. Consult with your attorney regarding your individual state registration requirements. Now that you are registered you need to know what paperwork to file and if you are subject to a surprise custody exam. This is the uniform application for the investment adviser registration that is filed with the SEC. The form is filed annually no later than 90 days after the end of the Fund s fiscal year. (A December 31 st year end would need to file by March 31 st ). This form must be filed promptly during the year upon any material changes to the adviser s registration. Now that you have determined your registration status, you need to determine if you are subject to Rule 206(4)-2 and of The Investment Advisers Act of 1940 ( Custody Rule ). Generally, most advisors to private pooled funds satisfy the Custody Rule by having an unqualified U.S. GAAP audit of the fund distributed to fund participants within 120 days of year end (or 180 days for a fund of fund). This U.S. GAAP audit must be performed by an accounting firm that is registered with and subject to inspection by the PCAOB.

13 Under Rule 13D, an investor is required to disclose with the SEC when a person or group acquires more than 5% of any class of a company s shares. This must be disclosed within 10 days of the transaction that pushes it to 5%. This form must be filed using the SEC s Electronic Data Gathering, Analysis and Retrieval ( Edgar ) system. The basic difference between a 13G filing and a 13D filing has to do with the investor s intent. If the investor intends to influence the management of the company that they are invested in, they must file a 13D. This form is filed by institutional investment managers in compliance with Section 13(f) of the Securities Exchange Act of This form must be filed once an institutional investment manager exercises investment discretion over $100 million or more in Section 13(f) securities. An updated list of current 13(f) securities can be found on the SEC website: investment/13flists.htm. This form must be filed using the SEC s Electronic Data Gathering, Analysis and Retrieval (EDGAR) system. This notice must be sent to all individual investors on an annual basis. This is to comply with the Gramm-Leach-Bliley Act. The Notice needs to contain a clear and accurate statement of what the company s privacy practices are and who you would potentially share non public client information with. This may generally be ed to individuals or sent in the mail. You have successfully navigated the launch period of your fund and have begun to invest for your investors. In order to continue to raise capital and to maintain current investor confidence, it is key to put into place back office procedures. Some of the following are great steps to take: Daily reconciliations of trades/cash. Establish a dual signature requirement for any cash movement. Maintain some form of shadow books. Reconcile the monthly NAV prepared by administrators to your shadow books. Have a disaster recovery plan in place. Maintain a strong compliance environment by monitoring personal trades and employee ethics.

14 Disclaimer: These materials provided by Citrin Cooperman & Company, LLP, are intended to provide general information on a particular subject or subjects and are not an exhaustive treatment of such subject(s) and are not intended to be a substitute for reading the legislation or accounting standards themselves, or for professional judgment as to adequacy of disclosures and fairness of presentation. The materials do not encompass all possible disclosures required by accounting principles generally accepted in the United States of America. The form and content of each reporting entity s financial statements are the responsibility of the entity s management. The materials are being provided with the understanding that the information contained therein should not be construed as legal, accounting, tax or other professional advice or services. The contents are intended for general informational purposes only and it should not be used as a substitute for consultation with professional accounting, tax, legal and other advisors. The materials and the information contained herein are provided as is, and Citrin Cooperman makes no express or implied representations or warranties regarding these materials or the information contained therein. Without limiting the foregoing, Citrin Cooperman does not warrant that the materials or information contained therein will be errorfree or will meet any particular criteria or performance or quality. In no event shall Citrin Cooperman, its officers, principals and employees be liable to you or anyone else for any decision made or action taken in reliance on the information provided in these materials. The information and content provided in these materials is owned by Citrin Cooperman and should only be used for your personal or internal use and should not be copied, redistributed or otherwise provided to third parties. In order to comply with U.S. Treasury Regulations governing tax practice (known as Circular 230 ), you are hereby advised that any tax advice provided herein was not intended or written to be used, and cannot be used, by any taxpayer for the purpose of (i) avoiding U.S. federal, state or local tax penalties, or (ii) promoting, marketing, or recommending to another party any transaction or matter addressed herein.

15

16 CAYMAN CONNECTICUT NEW JERSEY NEW YORK PENNSYLVANIA