How is a hedge fund started? What are the requirements/regulations? How to file for company's broker license?

Question

I would really appreciate it if you could provide me some links to official sites that would answer my questions. Thank you very much!

Answer 1

Hedge funds are not regulated, so there is no official site. The most important requirement is that all your U.S. clients must be accredited investors (individuals with more than $1 million in investable assets or with annual income over $300,000, or organizations with investable assets over $5 million, or regulated financial institutions regardless of assets). Another requirement is that you do not advertise your fund and do not offer it to anyone who is not willing to sign a piece of paper saying they are an accredited investor.

To operate a hedge fund, you do not need a broker license. You might consider getting registered as an investment adviser though.

The mechanics of starting a hedge fund depends on whether you expect to market it to taxable U.S. investors. If that's the case, you need to structure the fund as a U.S. limited partnership. If you plan to market in only to foreign investors and tax-free U.S. investors (pension plans, college endowments, non-profit foundations, etc.), you can structure the fund as an offshore corporation in a convenient jurisdiction (Bermuda, Caymans, Channel Islands, Luxembourg, etc.) Usually, the law firm (or, in case of offshore fund, firms -- one in the U.S., the other in the fund domicile) you hire take care of all the paperwork.

To actually trade, you will need a prime broker (most prime brokerages are units of large brokerage firms, although there are a few specialists). The choice of prime broker depends on what instruments you plan to trade and how much money you have under management (some firms have minimums as high as $20 million, others will work with you even if you have only $1 million).

A good fund usually has an independent administrator (a company that keeps the fund's books on a day-to-day basis and calculates net assets and performance at the end of each reporting period) and an auditor.

To market your fund, you may consider engaging a third-party marketing firm or use capital introduction service provided by your prime broker.

That's about it, really...