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What is important to know about a hedge fund’s “soft dollars” |
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Can Third Parties sell Interests in the Hedge Fund? |
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What are 'offshore' hedge funds? |
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Who can invest in offshore hedge funds? |
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Do I still pay fees even if the fund loses money? |
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What are hurdle rates? |
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What are lock-up periods? |
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What is a "Master/Feeder" structure? |
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What is important to know about a hedge fund’s “soft dollars” |
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General partners should make certain that soft dollars are not used to circumvent the expense
sharing arrangements set forth in the partnership agreement and that their use is properly disclosed
and properly documented. |
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Can Third Parties sell Interests in the Hedge Fund? |
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You can use third parties to sell the fund, but typically substantial investors will not consent to the use of their own money to pay commissions. Furthermore, anyone who sells your units must be licensed as
a broker/dealer. To that end, a Hedge Fund manager may generally use his affiliated broker/dealer to
execute trades on behalf of the hedge fund, but in all cases the general partner of the Hedge Fund will
be obligated to seek best execution on behalf of the fund and should disclose the possibility of execution of trades by an affiliate. |
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What are 'offshore' hedge funds? |
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“Offshore funds are investment companies, organized outside the United States, which offer their securities primarily to non-U.S. investors (and, as noted above, to U.S. tax exempt investors in some instances). These funds do have contacts with the United States, however. First, the fund's portfolios consist of securities of American issuers which are usually traded in United States securities markets. Secondly, the managers of these funds are generally American money managers. Investment managers who have significant potential investors outside the United States typically create offshore funds. The advantage of an offshore fund is that the investors in the fund would generally not be subject to United States taxation as long as the fund complied with certain rules established by the Internal Revenue Service. U.S. fund managers typically create offshore funds in Caribbean jurisdictions, although a European offshore entity may be more appropriate if a significant number of European investors are involved. Offshore funds are also attractive to U.S. tax-exempt investors as a way to avoid UBTI. An offshore fund generally makes sense only if a money manager has significant clients or prospects that reside outside the United States. When initially breaking into non-U.S. markets, many U.S. money managers will utilize their contacts that have significant experience and resources in the investment community outside the U.S. Money managers often permit these "sponsors" to invest in their offshore funds on favorable terms or pay them a finder's fee for investors that are brought to the
table. |
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Who can invest in offshore hedge funds? |
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Primarily, non-U.S. Citizens or non-taxed entities can invest in offshore hedge funds .
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Do I still pay fees even if the fund loses money? |
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This is dependent on the fund's policy. Some funds have a "high water mark." This means that if you lose more than your initial investment, the fund will not charge you their incentive fee until you at regain the initial investment back. You WILL however, pay a management fee on your assets that remain in the fund. This management fee is typically 1-2%, but can go as high as the manager deems appropriate. |
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What are hurdle rates? |
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The minimum investment return a fund must exceed before a performance allocation/incentive fee can be taken. |
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What are lock-up periods? |
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Lock up periods signify the time period that you must hold your assets in the fund before they can be removed. |
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What is a “Master/Feeder” structure? |
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A “master/feeder” structure is one in which assets from domestic and offshore funds are dropped into a “master” fund which serves as the investment entity for both funds. |
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| FAQ's are provided courtesy of www.hedgeco.net |
