Launching a Hedge Fund: Legal, Financing & Technology Considerations for 2011

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