Our editors have gathered some useful information on hedge funds and their creation, and explain the steps for a quick setup of one of the most employed types of investment funds in the world.
| Quick Facts | |
|---|---|
| Availability across the world |
Yes, possibility of creation in most countries in the world |
|
Types of investors they address |
Qualified and professional investors |
|
Legal forms used for creation |
Corporate forms (companies with variable and fixed capital), non-corporate forms (partnerships, other types of entities). |
| Authorization required (Yes/No) |
Yes, in accordance with the country of registration |
| Investment strategies accepted | General and selective trading, long-pull strategies |
| Local manager required |
In accordance with the legal requirements of the country of registration. |
| Appealing destinations to be created in | Singapore, Hong Kong, Switzerland, Luxembourg |
| Hedge fund startup use (Yes/No) | Yes |
| Advantages | Popular all over the world, possibility to use for cryptocurrency investment fund creation, low taxes, quick registration procedure. |
| Categorization | Hedge funds enter the category of alternative investment funds (AIFs) |
|
Special licensing requirements when operating abroad (YES/NO) |
Hedge funds can operate internally and externally |
|
Special licensing requirements when operating abroad (YES/NO) |
Yes, special authorization or passporting rights may be required depending on the jurisdiction |
| Assets to invest in |
Hedge funds can invest in: – equity; – commodities; – currencies, including crypto; – fixed income, etc. |
| Capital requirements |
The capital of a hedge fund depends on the jurisdiction it is set up in and the legal form it uses |
| Necessity to appoint a broker (YES/NO) |
Yes, hedge funds can appoint brokers |
| Audit requirements (if any) |
Most hedge funds comply with the International Financial Reporting Standards (IFRS) |
| Types of hedge funds (if any) |
– Global macro funds; – relative value funds; – activist hedge funds. |
| Special management requirement (YES/NO) |
Yes, hedge funds must appoint licensed managers in most countries |
| Taxation of hedge funds | In most countries, investors are subject to the personal income tax on the income obtained from their investments |
| Hedge fund creation stages |
– Establish the trading strategy, – select the fund structure, – get acquainted with the local legal requirements, – choose the service providers, – establish the marketing and fundraising strategies, – launch of the fund. |
|
Criteria for determining the hedge fund structure |
– The country to operate in, – the investors addressed (onshore/offshore), – the investment strategy. |
|
Types of hedge funds by structure |
– Standalone funds, – master funds, – side-by-side funds. |
| Characteristics of standalone funds | These funds invest without any feeder and are often an option for offshore fund managers. |
| Characteristics of master funds |
They are made of 3 entities: the main one and a feeder fund operate locally, and the third one operates abroad. |
| Characteristics of side-by-side funds |
They are set up as limited partnerships and used for offshore activities. |
| Local address required (YES/NO) |
Yes, in most countries, a local address is required. |
| Possibility to set up cryptocurrency hedge funds (YES/NO) |
Yes. |
| Countries where crypto hedge funds can be created |
– Singapore, – Hong Kong, – the Cayman Islands, – Switzerland, – Luxembourg. |
| Requirement to comply with anti-money laundering regulations (YES/NO) | Yes. |
| Service providers to be hired by hedge funds |
An administration, a CPA accountant, a broker, a custodian. |
| Most appealing countries to open a hedge fund from a taxation point of view |
– Luxembourg, – Singapore, – Malta, – the Cayman Islands. |
| Best countries to open a hedge fund in Europe |
– Luxembourg, – Malta, – Ireland, – the Netherlands, – Liechtenstein. |
| Best countries to open a hedge fund in Asia |
– Singapore, – Hong Kong. |
| Best offshore jurisdictions to open hedge funds |
– The Cayman Islands, – Seychelles, – the British Virgin Islands. |
What is a hedge fund?
A hedge fund is a private investment vehicle that gathers money from investors and that relies on complex strategies to obtain high returns. For this purpose, such a fund is considered a high-risk investment. In most cases, a hedge fund will invest in liquid assets.
What are the steps to create a hedge fund?
Here are some of the steps for starting a hedge fund:
1. Choose the appropriate team: a successful hedge fund will carry its operations through the team that will represent it. In this sense, the hedge fund will need junior analysts, junior traders, and a chief financial officer.
2. Choose a suitable business name: you will need to register the vehicle under a designated business form. In this sense, words such as ‘’group”, “asset management” or “partners” are strongly recommended.
3. Pool the necessary capital: starting a hedge fund will require a considerable initial capital, depending on the country in which the fund is registered.
4. Learn the legal requirements for hedge funds: depending on the country in which the hedge fund will be registered, the investors will have to comply with a set of regulations.
How does a hedge fund work?
Hedge funds:
- rely on the managers who will use various financial tools to make decisions related to the investments, as such, they will not base their decisions on indexes;
- can specialize in one or more types of assets, and the investment decision remains at the discretion of the manager.
You can find out how to open a hedge fund in the infographic below:
What types of investors does a hedge fund address?
Hedge funds address accredited and professional investors only.
What are the investment strategies of a hedge fund?
The most common investment strategies are:
- general trading, where the investor will predict and participate in accordance with what happens on the market;
- selective trading, which implies picking stocks expected to perform well over a short period;
- buying at low prices and selling at high ones, however, this requires patience and good anticipation of the market;
- long-pull selection where the investor will choose stocks they anticipate to grow quicker than others; however, this is a long-term investment strategy.
Is there only one type of hedge fund available for creation or are there others, too?
There are several types of hedge funds available for creation, as described below:
- equity hedge funds: they are the most common and are created to invest in stocks;
- global macro hedge funds: such funds are created to profit from market changes based on major political or economic events;
- relative value hedge funds: they are established to leverage temporary differences in securities prices;
- activist hedge funds: such funds invest in businesses and carry out activities meant to increase the stock price.
What are the most common legal entities used to create a hedge fund?
The private limited liability company and the limited partnership, as they can be used to create master-feeder structures.
What are the documents required to launch a hedge fund?
The most important documents are:
- the Articles of Association or the partnership agreement, for a limited liability company, respectively, limited partnership;
- the offering document, which covers the terms of the fund offering.
Are there specific management requirements applicable to hedge funds?
Yes, they must be managed by an independent management company.
How long does it take to register a hedge fund?
Depending on the jurisdiction, it can take around 6 months to register one, as this is one of the fastest types of investment funds to be set up all over the world.
More details on how to set up an investment fund as a hedge fund are available in the video below:
What are the advantages of hedge funds?
Here are some of them:
- they are widely used on both domestic and foreign markets, hence their popularity;
- they are employed with the purpose of generating important returns;
- they can be used by accredited investors only; however, they are subject to less financial market regulatory authorities’ supervision;
- they are easier to set up compared to other investment funds, such as mutual funds.
What are the most common jurisdictions to set up hedge funds?
- in Europe: Malta, Luxembourg, Switzerland, and Ireland;
- in Asia and the Middle East: Singapore, Hong Kong, and Dubai;
- in the rest of the world: the USA (specifically Delaware), the Cayman Islands, Bermuda, the Bahamas, British Virgin Islands.
We invite you to study our online magazine on a regular basis to find out further information on setting up an investment fund in one of the most important jurisdictions so that you can make an informed decision on this matter. Our partners can help investors with solid information on the financial legislation applicable in their preferred jurisdiction.