Launching a Hedge Fund – Part 2: The Art of Partner Selection

When launching a hedge fund, assembling a team of key partners is critical to ensure the smooth operation and success of the fund. Each partner plays a unique role and contributes to different aspects of the fund’s establishment and ongoing management. Here’s an in-depth look at the key partners you’ll need:

Law Firm

A law firm specializing in hedge funds is essential for navigating the complex legal landscape. Their role includes:

• Fund Formation: Assisting with the creation of the fund’s legal structure, drafting the offering memorandum, and establishing the fund’s legal entity.
• Contract Negotiation: Drafting and negotiating contracts with various service providers, investors, and other stakeholders.
• Litigation and Dispute Resolution: Providing legal support in case of disputes or regulatory investigations.

Selecting a law firm with a strong track record in hedge fund law is crucial. Look for firms with experience in your fund’s specific strategy and geographic location, as well as those with a deep understanding of regulatory requirements.

Prime Broker

The prime broker is a cornerstone of hedge fund operations, providing a range of critical services. These include:

• Trade Execution: Prime brokers facilitate the execution of trades, enabling you to buy and sell securities efficiently.
• Custody Services: They hold and safeguard your fund’s assets, ensuring their safety and proper management.
• Margin Financing: Offering leverage to amplify returns, prime brokers provide loans secured by your fund’s assets.
• Securities Lending: They facilitate short selling by lending securities to your fund.
• Operational Support: They often provide additional services such as risk management tools, trading platforms, and access to research.

Choosing the right prime broker involves assessing their reputation, service quality, fees, and the breadth of services offered. Ensure they have experience with funds of your size and strategy and can meet your specific operational needs.

Audit & Tax Firms

The selection of an audit and tax firm is a critical decision for a fund manager because it impacts not only the fund’s compliance and financial reporting but also its tax efficiency and overall governance. Both audit and tax services play distinct, yet interconnected, roles in the success of a fund, and the correct choice of a firm that provides these services can have wide-reaching benefits including;

• Accurate Financial Reporting: Auditors verify the accuracy and reliability of a fund’s financial statements, which is essential for fund managers to maintain transparency with investors and regulators.
• Tax Efficiency and Optimization: Effective tax planning is critical for maximizing returns in an investment fund. A tax firm that understands the unique structure of the fund—whether it’s a hedge fund, private equity, real estate, or mutual fund—can provide tax strategies that minimize liabilities and optimize after-tax returns for investors.
• Investor Confidence and Trust: Investors are highly sensitive to the quality of financial reporting and tax efficiency. A reputable audit and tax firm provides assurance to investors that the fund’s financials are accurate and the funds operations have been optimized to generate the maximum return on invested capital.

Making the right choice in audit and tax firms provides a solid foundation for long-term success, efficient operations, and robust governance.

Fund Administrator

A fund administrator, such as STP, plays a crucial role in managing the operational and administrative functions of the fund. Their responsibilities include:

• NAV Calculation: Calculating the Net Asset Value (NAV) of the fund, which reflects the value of the fund’s assets minus liabilities.
• Investor Reporting: Preparing and distributing reports to investors, including performance reports and account statements.
• Trade Processing: Handling the processing of trades and ensuring accurate trade settlement.
• Reconciliation: Performing reconciliation of transactions, cash, and positions to ensure accuracy.

Choosing a fund administrator like STP involves evaluating their technology platform, service quality, and ability to handle the specific needs of your fund. Their services should integrate seamlessly with your operational processes and provide reliable and timely reporting.

Compliance Firm

A compliance firm, such as STP will provide critical support in managing regulatory and compliance requirements. Their services include:

• Regulatory Monitoring: Keeping up-to-date with changes in regulations and ensuring your fund complies with all applicable laws.
• Compliance Programs: Developing and implementing compliance programs and policies tailored to your fund’s operations.
• Training and Education: Providing training for staff on compliance issues and regulatory requirements.
• Audit Support: Assisting with internal and external audits to ensure compliance with regulatory standards.

Laying a Solid Foundation for a Successful Hedge Fund Venture

Partnering with a compliance firm like STP with expertise in hedge fund regulations is essential. They should offer a comprehensive understanding of both domestic and international regulations, depending on where your fund operates.

Each key partner plays a distinct and vital role in the successful launch and operation of a hedge fund. From the prime broker facilitating trades and providing financing to the law firm ensuring legal compliance, the accountant managing financial reporting, the compliance firm overseeing regulatory adherence, and the fund administrator handling day-to-day operations, each partner contributes to the fund’s overall success.

Careful selection of these partners, based on their expertise, track record, and ability to meet your fund’s specific needs, is essential. By assembling a team of trusted and skilled partners, you lay a solid foundation for a successful hedge fund venture.

Next week we will discuss which technology you will need access to along with implementing those, timing, and costs.  If you missed part 1 in this series, you can read that here – Launching a hedge fund – Think Tank.