Registering as a hedge fund
Sorry if this has been asked before -- I did try to search for any previous threads that address these questions:
I'm trying to start an investment business and I'm wondering exactly how to structure. I know getting registered as an RIA is relatively affordable and straightforward -- what I'm curious about is what steps differentiate an RIA from a hedge fund, and what the extra cost burden is, and what the benefits are.
More specifically:
What legally differentiates an RIA and a hedge fund?
How much does it cost to register as a hedge fund?
Can an RIA charge % of alpha, or only % of AUM? What allows a hedge fund to do this that prohibits an RIA? Can an RIA employ the same shorting/derivatives techniques that a hedge fund can?
Appreciate any input. Thanks.
A couple of things: 1) A hedge fund is a type of investment vehicle and does not, technically, refer to the management company. The most common structure for a hedge fund is a limited partnership with the management company serving as the general partner. If you go to most fund websites you will see that they refer to themselves as hedge fund sponsors or advisers, not as "hedge funds." The adviser to a hedge fund may or may not be an RIA.
1B) In practice hedge funds refer to investment partnerships that are only open to accredited investors so they are exempt from certain regulations that apply to other investment vehicles (ie mutual funds).
2) It's a common misconception that mutual funds "can't" do things like short sell, use derivatives, use leverage etc. They can, though many don't. One thing they generally cannot do is charge incentive fees as a % of gains, but they can have management fees that adjust based on performance.
3) RIA refers to a registration status of a company that gives investment advice and manages investor assets, not the legal structure of the funds it manages. Broadly speaking, anyone who receives payment for managing funds needs to register as an RIA, unless they only have accredit clients in which case they are exempt though some still choose to register. The fund I work for is an RIA though we don't have any non-accredit investors. An RIA may manage a number of types of vehicles including mutual funds, hedge funds, and managed accounts.
To summarize: The question isn't RIA vs. hedge fund. It's hedge fund vs. mutual fund vs. other investment vehicle structure (managed account, etc) and RIA vs. not an RIA.
Another legal structure worth investigating is the Commodity Trading Advisor (CTA) which I don't know a ton about but from what I've heard is very easy to register/lightly regulated though it's limited in terms of size/scope of investor base and can only invest in futures markets.
Thanks so much for the comments Ken (and excellent avatar btw -- love that show).
So, legally speaking, it shouldn't be substantially more difficult to get organized as a hedge fund advisor than as a standard RIA managing client funds directly -- just with the added step of setting up the hedge fund LP.
I'm currently studying for the series 65 and hope to sit for it in the next month or two and get all the legal structures up and running prior to that. Up to this point we've been pursuing arrangements that would include not only capital injection but also would exist in specific legal avenues (like a house account with an existing fund) or would include organizational support (like a seeder), and we're starting to think it might be more straightforward to simply get set up as hedge fund advisors and then gather clients from there.
Incorrect. I don't think you understand how investment vehicles are structured legally. Pretty much every investment management company has the same legal structure-one entity is the management company and serves as the general partner or adviser to the fund entities. This is true for mutual funds as well as hedge funds, private equity funds, natural resource MLPs, etc. If I buy a share of an XYZ Asset Management bond fund, I'm not depositing money with XYZ directly or buying a stake in XYZ the asset management company, I'm buying a share of XYZ Total Return Bond Fund Retail Class at NAV. Managed accounts may be one exception.
In fact, setting up should be EASIER than an RIA because in theory you don't need to do that paperwork. The difficulty comes from sourcing assets solely from HNW clients.
To be honest if you're trying to get this done in the next month you need some actual, non-internet legal advice and to get someone with more experience in the asset management field involved.
Pretty much, unfortunately.
I think this is where I might have gotten confused.
Right, managing the fund without a series 65 and an RIA should be possible assuming you follow the Act 40 regulations relating to qualified investors?
Yeah, I'm a quant guy and trying to navigate all the regulatory and legal stuff on my own is rapidly becoming unsustainable. I was hoping it might be possible to find may way through it on my own but that increasingly seems infeasible.
Yeah, I know it's a bummer to incur those expenses but better safe than sorry. You're correct that you don't need a 65 or to be an RIA as long as you're exclusively for accredited investors-we are an RIA because certain types of institutional investors like that but no one has a 65 since we don't do any retail distribution.
Also, managed accounts sound like an easier option but from what I understand they have their own headaches (custodizing assets=major amounts of work, plus you can't commingle funds so you have to split trades between each account etc. which can drive up costs) There are hub-and-spoke structures that help with that but then you're back into the same amount of legal entities, set up costs, etc as a traditional LP or mutual fund set up.
Yeah, we're just going to have to circle more money and get the legal shit taken care of -- no way around it.
Incidunt iure sequi rerum eos. Totam voluptatum et quia atque ratione.
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