By Dina Ferriero,

Tuesday, February 15th, 2011

Last week, we hosted a webinar on Launching a Hedge Fund: Legal, Financing & Technology Considerations for 2011 . We spoke with some prominent industry experts regarding a variety of factors that managers should keep in mind when starting a hedge fund.

In Part 1 of this series, we took a look back at some insights from Sam Stock of Goldman Sachs on the financing aspect of a hedge fund launch. Today, well discuss some important points that were raised by Gus Black of Dechert LLC during the webinar regarding legal factors involved in the launch process.

Establishing a Management Company

There are a number of critical legal factors that must be taken into consideration during the earliest stages of a preparing for a hedge fund launch. Following are some of the fundamental decisions involved in the establishment of a new management venture.

Location

Selecting the most appropriate geographic location for your firm is crucial. Typically, this is going to be determined in large part by where the team is physically based and where they prefer to live. Over the last few years, however, as the regulatory and tax environments in the U.K. have become more punishing (52% effective taxation!), some new firms are looking to establish themselves elsewhere. While we have not seen a major exodus out of the U.K. there is a definite trend emerging of managers looking to move east, especially to the Singapore and Hong Kong regions.

Economics and Ownership

The structure of the entity is another important decision that managers must make. Whether it be a partnership, corporation, or other form of business, deciding how the firm will be structured is a major step in the pre-launch process.

Governance

Will your firm be run primarily by one dominant individual, or will you have a team of three or four or more who will make major decisions as a group? It is also crucial to determine who will have what responsibilities based upon differing areas of expertise and experience.

Regulation

This will be an important factor regardless of where the organization is based. Be sure to gain at least a high level understanding of the pertinent hedge fund regulations for your funds region early on in the process.

Key Considerations: Fund Structure

When determining how you will structure your new hedge fund (a legally separate entity from the management firm), there are several key points to think about. A few of the most important considerations are below:

Investor Requirements versus Investor Preferences

This distinction is critical because it deals with the lifeblood of the fundcapital. You will need to determine what the investor requirements are, as opposed to preferences, at an early stage. For example, a requirement may include we are legally prohibited from investing in funds in the Bahamas, whereas a preference may be we tend to favor funds in certain locations over others. It is very important to make this distinction, because often something that appears to be an investor requirement can quickly become a preference when the performance is right or there are other attractive features of a particular fund that make them want to invest.

Tax Efficiency & Flexibility

Tax efficiency is fundamentally important at three levels: the investor level, the fund entity itself, and any downstream structuring between the fund and its investments. The goal should be to maintain the lowest tax levels possible, while ensuring that the vehicle remains flexible and supportive of the managers strategy.

Other important fund structure considerations include: