Forming new fund

B

bigmonkey

Greetings.

My apologies because this question must have been asked many times before, but I really want to get your opinion before talking to lawyers.

I am trying to start up a fund, the basic facts are the following:

I am US citizen
All my clients are Chinese
Initial investment will be about 1M
basic long-short strategy, nothing exotic
The clients are not being pursued by FBI, so they are ok disclosing there identities in the US
Tax consideration is of course important
Avoid potential liability and minimize cost are also important

So my question is: onshore? offshore? Inc.? LP? LLP? Master feeder? and why

I was thinking about offshore since people seem to suggest that is what you do when your investors are not from the US. Then I realized the initial cost and ongoing cost will be high to do it offshore. Plus my clients don't have to pay capital gain tax even with onshore fund in the US. So the tax is not an issue here.

So I am thinking about onshore limit partnership, which seems to be a lot cheaper to setup and maintain compare to offshore. It will be a while before I can approach any institutional investors, so I don't need top brand service providers, probably all I need is a solid administrator and PB, maybe a good auditor as well.

Really appreciate your opinion!
 
First off, you should be aware the People's Republic of China has restrictions on outward foreign investments by residents of the Chinese mainland. That applies to your fund.

Second, it's really about the comfort level of your investors. Keep in mind as an onshore fund, there are all sorts of anti-money laundering requirements for all limited partners. If you're using a third party fund administrator, they (or the prime broker) will require all sorts of very specific information about each of your investors. (Even if you do your own administration, you have to have similar documentation.) Furthermore, the US government will receive annual filings that show how much each investor has invested and profited.

I think your next step is to talk to a lawyer. I don't think the costs of an offshore are substantially higher than onshore. If you're not planning to take US money, there's really no reason to not just do the offshore.
 
Quote from bigmonkey:

Greetings.

My apologies because this question must have been asked many times before, but I really want to get your opinion before talking to lawyers.

I am trying to start up a fund, the basic facts are the following:

I am US citizen
All my clients are Chinese
Initial investment will be about 1M
basic long-short strategy, nothing exotic
The clients are not being pursued by FBI, so they are ok disclosing there identities in the US
Tax consideration is of course important
Avoid potential liability and minimize cost are also important

So my question is: onshore? offshore? Inc.? LP? LLP? Master feeder? and why

I was thinking about offshore since people seem to suggest that is what you do when your investors are not from the US. Then I realized the initial cost and ongoing cost will be high to do it offshore. Plus my clients don't have to pay capital gain tax even with onshore fund in the US. So the tax is not an issue here.

So I am thinking about onshore limit partnership, which seems to be a lot cheaper to setup and maintain compare to offshore. It will be a while before I can approach any institutional investors, so I don't need top brand service providers, probably all I need is a solid administrator and PB, maybe a good auditor as well.

Really appreciate your opinion!
More...

Michael Dorsey, the former general counsel from Knight Trading. He consults people forming Hedge Funds. He is a personal friend of mine. I can forward your info on to him.
 
I'll also add I've been working with a hedge fund attorney Bart Mallon out of San Francisco in establishing my fund. He runs a one-man shop, and mostly markets himself with a bunch of hedge fund blogs... he's very professional/informed, and I'm really pleased with the service he's providing.

By the way, I'm also Chinese.
 
Quote from heech:

I'll also add I've been working with a hedge fund attorney Bart Mallon out of San Francisco in establishing my fund. He runs a one-man shop, and mostly markets himself with a bunch of hedge fund blogs... he's very professional/informed, and I'm really pleased with the service he's providing.

By the way, I'm also Chinese.
More...


That sounds like your guy. Good luck.
 
Thanks guys, really appreciate your help.

Actually I just finished talking to Mr. Mallon on the phone, he is very good.

Since for offshore fund an independent administration company is usually required, do you guys happen to know the average cost of hiring one? I was told $5000 per month by one person and $1000 per month by another. This will pretty much decide whether it is feasible for me to run the fund offshore.

What other expenses does a offshore fund have to pay besides administrator, government registration fee, prime broker and once a year auditing?

Thanks again for all your help
 
Some fund administrators will give startup managers special pricing... they're hoping to grow with you. The lowest quote I got was $750/month from a firm down in LA. They seemed perfectly qualified, I just thought the monthly statements that they created were ugly.

I ultimately went with a different firm in Virginia made up of ex-E&Y guys, who's charging me ~$1200/month for online investor access + nice graphical statements. They also have a menu of additional prices for other services (ie: extra $150/mo if I want them to handle cash disbursement, etc, etc). If you would like their contact info, send me a PM.

By the way, the greatest on-going expense for me will be the auditor. I wanted to have a top-tier auditor for credibility, so I got quotes from the likes of RSM McGladrey and Rothstein Kass. Both started at around $25k/yr (tax + audit).

You can get a much cheaper deal if you don't need that type of credibility with your investors.
 
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