Just a quick note to the community that we’ve updated our post on hedge fund consultants to include a case study. A reminder to all hedge fund service providers that we are actively seeking articles to help enhance our website. We are particularly interested in articles on hedge fund accounting and administration including articles on FAS 157. We are also interested in hedge fund link exchanges – please contact us to discuss.
A recent study by PerTrac reveals that not all hedge funds are having terrible performance returns in this volatile market environment. The study also finds other interesting information including (i) many funds use little leverage and (ii) almost 50% of funds allow monthly redemptions (however the study does not mention the amount of funds which have used “gates” to limit redemptions). Other related hedge fund articles on Hedge Fund Law Blog include:
I just came across this speech by a former Acting Chairman of the CFTC. The speech discusses Commodity Pool Operators in the context of hedge funds. The original speech can be found here. Continue reading
The Hedge Fund Law Blog has been running for almost four months now (although we’ve posted articles previously written) and we appreciate all of the comments and insights from hedge fund managers and hedge fund service providers. Our goal is to provide the most relevant legal information to hedge fund managers as possible, so please let us know if you have any questions we can answer. Our other goal is to help managers establish their hedge funds so please contact us if you are thinking of starting a fund.
The following are the most popular articles on the hedge fund law blog as today:
Please contact us if you want to see articles on other topics or if you would like to start a hedge fund.
The SEC recently brought an action against the principal of a broker dealer for not being registered as a principal. There are many instances where members of the investment management are operating without having the proper registrations or licenses and many times these people think that they can remain under the radar as long as they aren’t acting fraudulently. In this instance the principal was not able to remain under the radar. Continue reading
Because life settlements are a unique investment which has characteristics not associated with other types of investments creative managers can choose to structure a life settlement hedge fund in many different ways. This article will detail (i) the potential life settlement hedge fund structures, (ii) life settlement investment program considerations, and (iii) a brief overview of life settlement taxation issues. Continue reading
In a speech given yesterday, CFTC Chairman Walker Lukken announced that he will step down as Chairman of the CFTC upon inauguration of President-elect Obama. Chairman Lukken also advocated completely the scrapping of the current regulatory structure in favor of a “bold, new” regulatory system. It is unclear how these comments will be interpreted by the CFTC, especially with regard to the release of the proposed forex registration rules. Continue reading
Capital introduction is the term used to describe investor referrals to hedge funds by prime brokers. Many prime brokers and even mini-prime brokers will provide capital introduction services to their customers. Typically this is done as a favor to the hedge fund and does not carry the high costs of a third party marketer. However, unlike a third party marketer, the prime broker is probably not actively looking for investors for the fund and therefore actual capital introductions may be rare, depending on a number of factors including the individual broker and the investment strategy. Continue reading
Hedge fund managers which are registered with their state of residence as investment advisors need to be very aware of their state investment advisory rules. While many state securities divisions do not pay attention to hedge funds, there are many states which are aware of hedge funds and understand how the state investment advisory rules apply to hedge funds. States which I have found particularly knowledgeable about hedge funds include: Colorado, Utah, California and Washington. There are other states which are basically on heightened alert for registration applications from hedge fund managers. Continue reading
Below is a question we received through the comment portion of this blog:
A fund we participate in converted in mid-2007 from a 3(c)(1) fund to a 3(c)(7) fund. Upon receipt of the K-1 for the year, there was a large realized short-term capital gain realized with a large corresponding unrealized capital loss. When I asked about what triggered the short-term gain, I was told that it related to the conversion to 3(c)(7) status. Is there anything within the conversion process which would inherently trigger recognition of a capital gain, especially short-term? Thanks for any insight you may be able to share with me on this.
First, let’s examine what it means to “convert” from a 3(c)(1) hedge fund to a 3(c)(7) hedge fund. There is no form that a hedge fund submits to the government or any agency which declares whether they are a 3(c)(1) hedge fund or a 3(c)(7) hedge fund. There is no sort of internal declaration like with certain IRS rules.
The 3(c)(1) structure limits the number of investors to 99, the 3(c)(7) structure does not limit the number of investors, but limits the type of investors. So, to “convert,” a hedge fund would just make sure that all of its investors were qualified purchasers and then have more than 99 of them. Therefore, when a hedge fund “converts” from a 3(c)(1) hedge fund to a 3(c)(7) hedge fund, the fund is basically informing investors that the number and “type” of investor in the hedge fund (a limited partnership or limited liability company) will be changing. (Please also note that a 3(c)(7) hedge fund with 99 or less investors would also be exempt from registration under the Investment Company Act as a 3(c)(1) hedge fund. )
When the conversion takes place, the fund would redeem those investors who are not qualified purchasers (the offering documents will typically provide managers with this unilateral authority). In order to have the cash on hand to mandatorily redeem the investors, the fund may have to liquidate some underlying positions. Based on the holding period of the underlying positions, the gain or loss may be long-term or short-term gain or loss, each of which has different tax consequences to investors in the hedge fund.
At the end of the year, the hedge fund accountant will prepare K-1s for all investors in the partnership which will include each investors allocation of gains and losses (realized and unrealized) during the year. The manner in which these gains and losses are allocated is generally dictated by the hedge fund’s offering documents, which generally allow the manager wide latitude in how to make allocations.
With regard to the specific situation above, I cannot answer this question because it depends on the facts. One thing an investor in this situation may want to do is review the audited financial statements from the hedge fund and then determine if an allocation was made which was incorrect – an accountant should be able to do this. If there is still a question on the allocation, the investor should discuss the issue with the hedge fund manager in conjunction with the manager’s auditor or accountant. From there the investor should be able to get further clarity on the issue.
Please note that the above is not legal advice and please read our disclaimer. Please also feel free to contact us if you have further questions. Other related HFLB articles include: