Launching a Hedge Fund: Legal, Financing & Technology Considerations for 2011
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Launching a Hedge Fund: Legal, Financing & Technology Considerations for 2011
February 2011
Our Speakers
Sam Stock, Executive Director
Goldman Sachs
Gus Black, Partner
Dechert LLP
Serge Bukhar, Executive Director
Eze Castle Integration
AgendaGetting Started– Initial Questions for Start-Up Funds– Pre-Launch Timeline
Legal Perspective– Documentation– Regulatory Issues
Technology Considerations– Common Technology Mistakes– Technology Requirements– Budgeting
© 2011, The Goldman Sachs Group, Inc. All rights reserved.
GOLDMAN SACHS PRIME BROKERAGE
Launching a Hedge FundSam Stock, Goldman Sachs
5© 2011, The Goldman Sachs Group, Inc. All rights reserved.
GOLDMAN SACHS PRIME BROKERAGE
Current Hedge Fund Environment
Hedge Fund Environment
Q1
2010 Q2
2010 Q3
2010 Q4
2010
Regulatory Environment
Redemption Pressure
Subscriptions
Closures
Fiscal Pressures
Funding Markets
Start-up Market
Performance
Regulatory& Fiscal
Investors
Strategy / Performance Performance
Difficult 2010 Macro Concerns
Easing BRIC’s Influence Improving
Fundamentals
US Volcker Central Clearing SEC/CFTC Registration
New Launch Environment Scarcity of New
Capital High Profile Launches
Europe MiFID Review EMIR – OTC Clearing Short Selling AIFMD Level II
Tax / Fiscal FATCA
UCITS Continued Growth Investor
Diversification Supply Driving
Demand
Seeding Seeding Funds Individual Tickets PM Teams
Prop Desks Impact of Volcker Track Record Industry Figures
6© 2011, The Goldman Sachs Group, Inc. All rights reserved.
GOLDMAN SACHS PRIME BROKERAGE
Initial Key Questions for a Start-Up
Do I need to be regulated?
How do I pick which country to launch in?
Who should be the CEO / CIO / PM / Head of Trading /
COO / CFO?
What systems do I
need?
How can you help me raise
money?
How do I differentiate
myself from the competition?
What service do you offer?
What does stock loan / locate /
borrow actually mean in practice?
Prime Brokerage and ClearingRelationship
Team / Office / Systems Build-out
Regulatory / Structuring Considerations
Who are the active investors
in Hedge Funds?
What should be my terms, fees, gates,
notice periods?
How does financing /
pricing work?
Can I customise my
reporting?
What sort of compensation will the individuals in my team expect and what sort of
benefits package?
What functions have to be
segregated? / Who reports to
whom?
What are the tax
considerations for the fund and
my staff?
What type of legal structure
should I choose?
Who pays for what between
fund and manager?
What are the other themes for new funds at present e.g. managed
account / UCITS?
What are my responsibilities on
the compliance front?
What do I need to document?
Which investor should I speak to and when?
Will you be able to provide
transparency to my investors if
needed?
How do I generate
momentum in my asset raising?
What sort of budget do I need to get
started?
What service providers do I
need?
What can I outsource, what has to be done
in house?
How do I monitor rule changes?
How should I think about seed
capital?
Do you price positions we
didn’t trade with you?
What in-house requirements
do I have?
What kind of questions should
I expect from investors?
Marketing / Asset Raising
Do I need a Prime Broker? How many?
7© 2011, The Goldman Sachs Group, Inc. All rights reserved.
GOLDMAN SACHS PRIME BROKERAGE
Week 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21
SERVICE PROVIDERS
Select Prime Broker
Select Tax Advisor/Auditor
Select Legal Advisor
Select Compliance Consultant
Select Administrator
Select Systems Providers
Select Bookkeepers
Select Insurance Provider
REGULATORY APPROVAL PROCESS
Complete FSA application
Submit FSA application
Approval process and questions
FSA authorisation
ESTABLISH MANAGEMENT COMPANY AND
FUND
Set up management company structure
Define fund domicile / structure
Agree term sheet
Investment objectives & policy
Complete fund questionnaire
Set up fund with prospectus, IMA etc
STAFFING
Define requirements and start recruitment process
Employee Benefits - Health/Life Insurance/Pensions
Training: Internal Systems and Procedures
Training: FX, Margin, Risk etc
SYSTEMS
Define portfolio management system requirements
Define other system requirements (OMS , Risk etc)
Onsite Demonstrations by chosen vendors at GS offices
Systems implementation (ongoing)
OFFICE SPACE
Select Office Space
Lease Process
Define Fit-out Specifications
Furniture & Fit-Out
TECHNOLOGY INFRASTRUCTURE
Define Requirements
Select IT integrator
Design Technology Solutions
Order & Installation of telephony & data circuits
Systems Configuration & Testing (BCP/DRP)
OPERATIONAL OVERVIEW
Operations manual
Business continuity plan (BCP) & Disaster recovery plan (DRP)
MARKETING
Preliminary discussions: Investors/Marketing material
Marketing plan & material
Investor Due Diligence Dry Run
Marketing
Incoming investor visits to your offices
LAUNCH Launch
Pre-Launch Timeline
February 2011
Austin Brussels Hartford Luxembourg Newport Beach Philadelphia Silicon Valley
Beijing Charlotte Hong Kong Moscow New York Princeton Washington
Boston Dublin London Munich Paris San Francisco
Launching a hedge fundSome basic legal considerations
February 2011
9
What follows is by no means an exhaustive summary. There is no substitute for early professional advice…..
10
Establishing a management company
• Location
• Legal structure
• Tax structure
• Economics and ownership
• Governance
• Regulation
11
Key considerations – spin outs
• Economics:– seeding
– capacity
– revenue sharing
– equity participation
• Governance / restrictions
• Track record
• Operational issues
• Employment issues
12
Key considerations – fund structure
• Investor requirements
• Investor preferences
• Tax efficiency – for investors
– at fund level
– downstream
• Flexibility
13
Additional considerations – fund structure
• Speed to market
• Cost
• Ease of governance and operation
• Availability of service providers
• Established and tested structure
• Legal system
14
Which domicile?
“Offshore”
• Cayman Islands
• BVI
• Bahamas
• Bermuda
• Channel Islands
• Mauritius
“Onshore”
• Ireland
• Luxembourg
• Malta (+ other EU)
• Delaware
• UK
• Hong Kong
15
Master fund
Example master feeder structure
Assets
InvestmentManager
Partnershipfeeder (optional)
Limited Partnership Interests
GeneralPartnerIMA
Investors (e.g. US taxables)
Corporate feeder
Shares
Investors (e.g. US tax exempt)
Limited Partnership Interests
16
Some terms to consider
• Investment objective, policy and strategy
• Investment restrictions (risk spreading)
• Liquidity terms
• Fee structure
• Tax issues– IME
– Reporting funds; etc,
17
Documentation
• Sales documents:– flip book
– private placement memorandum
– subscription documents
• Investment management [and marketing] agreement
• Service provider contracts:– Administration agreement
– Prime brokerage agreement / ISDAs
– [Custody agreement]
• Structural docs (e.g. constitutional, regulatory, listing)
18
Regulatory issues
• AIFMD– Marketing
– Depositaries
– Operational requirements
– Remuneration
• FSA– Short selling
– Remuneration
• Dodd-Frank
Launching a Hedge Fund: Technology ConsiderationsSerge Bukhar, Executive Director, Eze Castle Integration
Technology ConsiderationsCommon Technology Mistakes
Technology Requirements– On-premise vs. Hosted Infrastructures– Office Facilities– Infrastructure & Security– Archiving & Voice Recording– Business Continuity Planning & Disaster Recovery
Technology Budget
Key Takeaways
Common Technology Mistakes
Looking for the perfect solution
Insufficient planning for the future
Underestimating technology dependencies
Overestimating your capacity to manage technology
Shortchanging the training options and resources
…. and how to Avoid them
On-Premise vs. Hosted Infrastructures
Traditional Installation Managed & Hosted Service
Delivery On-Site Fully Managed & Hosted
Turnaround 4-6 weeks < 3 weeks
PricingPerpetual OS/Application Licensing + Maintenance
Subscription (All Inclusive)
Cost AllocationCapitalized (Upfront)
Expensed (Over Time)
Additional Costs
CustomisationUpdates/Upgrades
MaintenanceOn-Going Support
Additional Users & Resources Desktop Support
Platform Multi-Applications & OS
Updates Larger – Frequent - Ubiquitous Shorter – Invisible - Defined
Real Estate & Infrastructure
Explore options: Hedge Fund Hotel, Sublease, Independent office
Determine spacing needs
High-speed, high resiliency, secure
Firewall Client Site Router
ISP Edge Router
Desktop Server LAN
Office Facilities
Technology Infrastructure
Archiving & Voice Recording
Retain emails and IMs for prescribed amount of time by law
Store data in WORM format
Allow for searchable indexing of files
Keep archived data on your own server and make sure it is easily available
Archiving Voice Recording
Nov 2010: FSA finalised ruling that FSA-regulated firms will be required to record “relevant communications” on landline and mobile calls
“Relevant Communications” = conversations involving the receipt of client orders & the negotiating and arranging of financial transactions
FSA also recommends that firms do not provide mobile devices to employees
Disaster Recovery & Business Continuity
Disaster Recovery & Business Continuity
Disaster Recovery– Infrastructure-centric
– Details implementation & support of recovery infrastructure
– Minimizes & mitigates effects of outages/disasters
– Allows continuation/quick resumption of mission-critical functions
Business Continuity
– Identifies mission-critical services, functions & personnel
– Communication strategies
– Employee recovery procedures
– Employee information sessions, table top exercises and testing
Technology BudgetEnterprise Infrastructure - Data + Networking Year 1 Year 2Hardware and Software Email, IM & Bloomberg Archival Project Labor Total Enterprise Infrastructure - Hardware Enterprise Infrastructure - Voice Year 1 Year 2Avaya Voice Hardware & Labor Total Enterprise Infrastructure - Voice Enterprise Infrastructure - 3rd Party Services Year 1 Year 2Central Copier - Multifunctional Copier Blackberry Voice & Data Service Bloomberg Users Voice ISDN30/PRI Usage Including Taxes Total Enterprise Infrastructure - Services Enterprise Infrastructure - Circuits Year 1 Year 2ISP A ISP B ISP 1 – ISDN30/PRI ISP 2 - POTS Bloomberg Circuit Total Enterprise Infrastructure - Circuits Additional Services Year 1 Year 2Disaster Recovery Monthly Service Total Enterprise Infrastructure - Misc. TOTAL EXPENDITURE
Key TakeawaysUptime is top priority – downtime is not acceptable – Understand the risks your firm faces
Plan for growth
Identify primary (critical) and secondary apps and business processes– Knowledge = cost-effective and optimized technology
Remember one size does not fit all– Understand your options and make sure your technology
provider is prepared to scale with you
Eze Castle Integration OverviewFounded 1995
Mission To be the leading provider of IT services and technology solutions to the investment community worldwide
Headquarters
Additional Offices
Boston
New York City, Chicago, Dallas, Geneva, Minneapolis, Los Angeles, San Francisco, Singapore, Stamford and London.
Phone 1.800.752.1382
Website & Blog www.eci.comwww.eci.com/blog
Core Services • Strategic IT Consulting
• Outsourced IT & Help Desk
• Professional Services
• Managed Services
• Startup & Relocation
• Communications Solutions
• Network Design & Management
• Business Continuity Planning
• Disaster Recovery
• Compliance Solutions
• Storage Solutions
• Cloud & Colocation Services
• Internet Service
• E-Mail & IM Archiving
271 Regent Street, 2nd Floor London, W1B 2ES, United Kingdom Tel: +44.207.071.6802 www.eci.com
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