Get Started with Hedge Funds!
If you read investment fund news or articles, you must have heard about hedge funds. However, to a beginner, their function might sound as complex as the name itself.
Reading the right resource can clear all concepts and questions, and with this article, we aim to tell you all there is to know. So, let’s dive straight in and get started with hedge funds.
What are hedge funds?
Hedge funds use pooled funds to invest in alternative assets or strategies. Investment can include the use of derivatives, alternative investments, or leverage in domestic and international markets.
Hedge funds are no different from other funds, except that they are not offered direct to the public being the retail investor.
Instead, only institutional, or professional investors can invest directly in a hedge fund.
An advisor can however assist a retail investor to invest in a hedge fund.
How are hedge funds structured?
Statistically, 99% of hedge funds are structured to run as a limited partnership intentionally.
This type of legal structure includes General Partners (GPs) and Limited Partners (LPs).
In simple terms, GP’s are the fund managers who are responsible for managing a given investment fund, whilst LP’s are investors who have a profit share proportionate to their investment.
However, in Australia, funds are set up as Managed Investment Schemes which are predominantly set up as a unit trust or a series of stapled unit trusts.
Typically, limited partnership structures do not offer the same beneficial tax treatment afforded to a trust and therefore are less popular funding structures in Australia.
Funds are either listed or unlisted and may consist of one or more wholly owned sub-trusts.
An easy breakdown of a fund structure in Australia is:
- The Responsible Entity – is a limited entity
As Responsible Entity, it is responsible for the overall management of the Fund in accordance with its Australian Finance Services License (AFSL), the Constitution, Compliance Plan, Corporations Act and relevant law.
- The Fund Manager or Investment Manager – Is a Proprietary Limited Entity
The Fund Manager or Investment Manager is responsible for managing and administering the Fund’s investments (including its investment in the Sub-Trust), marketing of the Fund and Investor relations. The Investment Manager has also been appointed by the Sub-Trustee as the manager of the Sub-Trust’s investments.
- The Fund – is a Unit Trust
The Fund has an investment mandate to create a portfolio inline with its investment strategy. Investors will be issued Units and receive the benefit of any income and capital gains generated by property investments held directly or indirectly by the Fund (for example, via the Sub-Trust) by way of distributions and other income such as interest.
- The Sub-Trustee – Is a Proprietary Limited Entity
The Sub-Trustee is responsible for the overall management of the Sub-Trust and its assets (whether held directly or indirectly by the Sub-Trust), including undertaking investment within the agreed mandate or recommendation from the Investment
Manager.
Unlike the Fund, the Sub-Trust is not a registered managed investment scheme and so is not subject to direct regulation by ASIC. Specifically, the Sub-Trust is a special purpose entity established (and controlled) by the Fund, and will issue Units to, and make distributions to the Fund only.
What documents are needed to start a hedge fund?
Depending on the type of hedge fund you intend to operate, you will need either:
- Product Disclosure Documents (PDS); OR
- Information Memorandum (IM)
Both the Product Disclosure Statement or Information Memorandum will provide a descriptive snapshot of your business, covering the history, status and projected future position.
These documents are then issued to potential investors, so that they may learn about you and potentially invest in your business.
These documents are the bible to your fund. It sets out the terms and conditions of the fund, just like the commandments.
Usually, they are drawn up by a solicitor and can cost thousands of dollars.
Through the Investment Fund Project Program, we will provide you with discounts from our panel of partners, to get your fund off the ground started.
How are hedge funds managed?
Hedge funds may be managed aggressively (taking higher risks) or using safer techniques like leverage, derivatives, or taking short and long positions that reduce risk significantly.
Let’s see what these strategies mean.
- Leverage is an investment strategy of using borrowed money as a source of funding. The purpose is to expand the firm’s asset base and increase the potential return on investment.
- A Derivative is a financial security with a value that is derived from an underlying asset. (Hence, the name derivative). This asset can be a stock, index, currency, or commodity. Derivatives are a way to lock in prices, hedge against unfavorable movements in prices, and mitigate risks.
- Short position means selling a security first to buy it later at a lower price. Alternatively, taking a long position means buying a security to hold it and benefit from its rising valuation.
Looking to start a hedge Fund?
Here is a quick rundown…
To start a hedge fund in Australia, you need to hold an Australian Financial Services Licence (AFSL) and be a registered public company.
The Australian Securities & Investment Commission (ASIC) classifies a hedge fund as a managed investment scheme.
A managed investment scheme at a basic level is a fund where many investors come together and pool their money for a common investing goal as set out in the investment strategy.
The Responsible Manager, oversees and operates the scheme.
Once the fund has raised sufficient funds, the hedge fund managers will invest that money into deals following the investment strategy, and then splitting the profit between the fund manager and investors, being the unit holder of the trust upon completion of the deal.
Some hedge funds are Private Equity, Venture Capital, Real Estate or Equity share trusts, for example.
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Here is to your fund success!
Dolly Brtan
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DISCLAIMER: – All written content on this site is for educational and information purposes only. Opinions expressed herein are solely those of the author, unless otherwise specifically cited. All statements reflect the author’s judgment as of the publication date and are subject to change. The information contained herein does not include personalized investment advice, nor should it be construed as investment, legal, or tax advice. All ideas and information provided should be discussed with a professional advisor, certified accountant, or practicing lawyer before implementation. The ideas and information presented here is also not an offer to buy or sell securities nor a solicitation of any offers to buy or sell the securities mentioned herein.