Four Tips for Startup Funds
1. Raising enough seed capital
Some South East fund managers claim profitability with less than $5 million AUM, while others believe that North East & West Coast fund must manage $45 million–$100 million in assets to be considered a serious business venture that has some long-term prospects for survival.
2. Selecting the right service providers
Selecting the wrong service providers is an easy mistake for funds to make. Most funds need a prime broker, an administrator, a placement agent, an attorney and an auditor. Avoiding errors in this area is critical because the fund needs these services in order to operate successfully; further, they are part of the image the fund presents to investors in the marketplace.
3. Choosing cost-effective structure
Funds should choose a cost structure that is not only cost-effective but also most beneficial to existing or prospective investors. By understanding the fund manager’s investment strategy, including the nature of its targeted investors, your service providers can help select the right structure. In case if you expect to target offshore investors, you might be well-advised to set up an offshore feeder fund that would receive subscriptions from tax-exempt and foreign investors.
4. Tax considerations
Most U.S. hedge funds are typically structured as fund limited partnerships, or fund LPs, domiciled in Delaware (that state has a favorable legal environment for business and as such has historically been the preferred locale for U.S. companies). As a partnership, a hedge fund is not a taxable entity; rather, it is treated as a flow-through entity for U.S. tax purposes. Generally speaking, each fund LP will have its own management company and General Partner.