An Introduction to Hedge Funds

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An Introduction to Hedge Funds

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This new introductory text, clearly explains what a hedge fund is, how it interacts with service providers, how it operates and - particularly appropriate to today’s markets - what happens when things go wrong.

Hedge funds are one of the most dynamic, and important, players in the financial services industry and command worldwide attention. This primer, authored by a leading financial services industry participant, sets out the context of hedge funds and provides you with practical advice on how they operate.

It begins by defining the characteristics and functions of a hedge fund, illustrating who is involved both internally and externally. It goes on to provide a step-by-step guide to setting up a hedge fund and discusses how unregulated hedge funds are regulated.

It looks at hedge fund litigation and directs you to recommended resources. All of this is combined in a format that will enable you to grasp this important, complex subject relatively quickly. Aimed at newcomers to the hedge fund industry, this introductory text is particularly useful for:
- new hedge fund directors who have not previously served on a hedge fund board;
- investors seeking to learn about hedge funds;
- investment bankers that are transferring into a prime brokerage team;
- accountants responsible for hedge fund advisors;
- long-only fund managers that have been asked to co-manage a new long-short global equity hedge fund;
- anyone interested in understanding how a hedge fund works.
Introduction

1 Hedge Funds: What Are They?

What is a hedge fund?

Alternative investments

Private equity

Types of hedge funds

Hedge funds globally

Service providers

Should hedge funds be defined and regulated?

Do hedge funds pose risks?

What type of hedge fund will feature in this book?

2 Types and Structures of Hedge Funds

Corporate, limited partnership and unit trust models

Oversight

The securities of hedge funds

Strategies and weighting

Restrictions

Funds of hedge funds

Hedge fund variants

3 What’s in an Articles of Association, a Limited Partnership

Agreement or a Unit Trust Agreement?

Sources of law

Incorporation and capital structure

Memorandum

Articles

4 Setting up the Hedge Fund

Planning the hedge fund

Identifying service providers - the RFP process

Requests for Proposals

Selecting the prime broker

Selecting the administrator

The investment manager

The selection process

5 Hedge Funds and Service Providers

The investment manager

The administrator

The prime broker

SLAs

6 How to Read an Offering Memorandum

Drafting

What goes into an Offering Memorandum?

Cover page

Important information

Directory

Definitions

Summary (or key features)

Investment objective, policy and restrictions

Management

Service providers

Subscriptions

Net asset value

Fees and expenses

Risk factors

Conflicts of interest

Reports

Master fund issues

Taxation

General and statutory information

Appendixes

Private placement memorandum

Verification

7 How are Shares or Interests in a Hedge Fund Marketed?

Private placements

Investors

Due Diligence Questionnaires

Distribution

The subscription process

Equalisation

8 How is a Hedge Fund Operated?

Preparations for launch

Initial offering period

Research and fund management - and fiduciary duties

Trading

Prime brokerage

Administration

Compliance

Directors

Hedge fund indexes and informational services

9 Key Issues: Valuations, Corporate Governance and Side Letters

Valuations

Corporate governance

Side letters

10 What Happens When Something Goes Wrong?

Valuations

Collateral

Prime broker conflicts of interest

Loss of key employees

Risk management

Redemptions

Adding or changing service providers

Insolvency

Appendix 1. Example Articles of Association

Appendix 2. Documents to Launch a Cayman Islands Hedge Fund

Index
Mark Berman

Mark Berman, the founder and CEO of CompliGlobe Ltd, advises and conducts training programmes for hedge funds, investment managers, issuers, regulators and multi-national banks and brokers in Europe and Asia on SEC practice outside the United States, UK and EU issues and cross-border regulatory, compliance and AML matters. Mark was a senior lawyer with the Division of Corporation Finance and the Division of Market Regulation of the US Securities and Exchange Commission where he worked on disclosure and trading practices issues, respectively. He was a senior lawyer with the London Stock Exchange where he advised on UK, EU and US supervision, surveillance and regulatory matters and listing rules issues, and drafted the 1994 re-write of the trading rules. Mark began his career in financial services with Merrill Lynch. In 15 years of industry experience and apart from his time as a regulator, he held senior positions as head of legal and compliance, compliance officer, MLRO and assistant company secretary. He chaired and served on new product committees.

Mark wrote An Introduction to Hedge Funds (2007 Risk Books) and edited and contributed to SEC Regulation Outside the United States (6th ed. 2007 Risk Books) and Hedge Funds & Prime Brokers (2nd ed. 2010 Risk Books). He founded, chairs and speaks at “SEC Regulation Outside the United States” and the workshops “SEC Basics”, “SEC Inspections and CCOs” and “How to Navigate a Prime Brokerage Agreement,” given in Hong Kong, London, Singapore and other European and Asian locations. Mark is a member of the Advisory Council of the SEC Historical Society (Trustee from 2006 to 2009) and served on the task force for the SEC’s 75th anniversary. He is a member of the BSF Hall of Fame.