Frequently Asked Questions
In order to avoid registration under the Investment Company Act of 1940, there are two exemptions primarily relied upon by hedge funds. First, Section 3(c)(1) hedge funds are limited to one hundred (100) investors, thirty-five (35) of which can be non-accredited investors. Next, a 3(C)(7) fund is only open to an unlimited number of “qualified purchasers” – either an individual with a minimum of $5 million in net investment or an entity with a minimum of $25 million in net investment.
There is no legal requirement for a domestic hedge fund to utilize the services of a fund administrator. However, a fund administrator can be an essential partner in the management of any hedge fund, reducing the costs for yearly audits and tax preparation (i.e., preparation of Form 1065 and Schedule K-1’s). Moreover, hedge fund administrators further prove their worth by providing comprehensive
performance reports for management as well as fund investors.
An “incubator” hedge fund is a cost effective option for creating a marketable track record that can be leveraged to attract investors. Think of an incubator fund as a “startup” hedge fund with little record of performance, often funded through a small group of investors, often friends and family. With an incubator hedge fund, the fund promoters can test strategies and create a track record that can be relied upon at a later date to transition to a “professional” hedge fund with significantly larger amounts of capital under management. Typical jurisdictions for forming incubator funds include the British Virgin Islands, Cayman Islands. Saint Lucia and the United States.