In addition to investment management companies, there are other departments serving hedge funds. The most common are:
Main brokerage department: the main brokerage business includes margin financing and securities lending, acting as a counterparty in derivative contracts, executing transactions, clearing and settlement. Many large brokerage departments also provide custody services. Generally speaking, the main brokerage departments are the departments of large investment banks.
Management Department: The management department generally handles stock-related affairs and performs relevant liquidation functions. Some funds, especially those in America, will also be managed by their management companies. In this way, the investment management company can not only control the book net assets, but also obtain performance rewards through the increase of net assets, which may increase the inherent conflicts of interest. In countries outside the United States, it is generally stipulated that this function should be undertaken by a third party.
Marketing department: The marketing department is responsible for selling funds to potential investors. Usually this task is also undertaken by investment management companies.
place of registration
The legal structure of a hedge fund, especially its registered place and the type of legal entity, is usually determined by the tax environment of the target investor of the fund. Regulatory factors also have an impact. Many hedge funds are set up in offshore financial centers, so that when the portfolio appreciates, the funds do not have to pay taxes, and the taxes are borne by investors. Investment management companies usually set their headquarters in large financial centers and pay taxes according to the fund management fees charged.
It is estimated that in 20 1 1 year, half of hedge funds are registered offshore and the other half are registered onshore. The number of hedge funds registered in Cayman Islands ranks first in the world, accounting for 34%, followed by the United States, Luxembourg 10%, Ireland, 7%, British Virgin Islands, 6% and Bermuda, 3%.
Location of investment management company
Different from the fund itself, investment management companies are mostly onshore in order to attract a large number of financial talents and get close to investors. Most of the investments of hedge funds come from the east coast of the United States, mainly in new york City and the Gold Coast of Connecticut, where there are also the most hedge fund management companies. It is estimated that there were 7000 investment management companies in the United States in 2004.
London is the most concentrated place for hedge fund management companies in Europe. 20 1 1 At the end of the year, London owned 70% of the investment of hedge funds in Europe, equivalent to $395 billion. Asia, especially China, is an increasingly important source of funds for the global hedge fund industry. Asian hedge fund assets are concentrated in Britain and the United States, each accounting for about a quarter.
legal entity
Hedge funds for investors who pay taxes in the United States mainly adopt the limited partner system, because investors can enjoy relatively preferential tax treatment in the United States. In the limited partner system, investment management companies (although sometimes offshore legal persons) are generally general partners, while investors are limited partners. Investors outside the United States and those who don't have to pay taxes in the United States, such as States, companies, private pension funds and union pension funds, generally invest in offshore corporate funds because it can reduce or exempt some taxes. Sometimes, in order to attract Japanese investors, hedge funds will take the form of unit trust funds. This form does not affect the nature of the fund except the tax burden.
Investment management companies are responsible for organizing the establishment of hedge funds, and can also retain their rights and interests by acting as general partners of limited partnership funds or holding original shares of company funds. Primitive shares generally have no economic rights, and voting rights are limited to certain matters, such as choosing an investment manager. The strategic decision of the fund is made by an independent board of directors, which generally accepts the opinions of the investment manager.
The essence of openness
Hedge funds are generally open-ended, that is, investors can purchase or redeem them at regular intervals. The issue price and redemption price of company funds are both unit net value. Therefore, if the assets invested by the fund appreciate, the unit net value will increase, and the amount redeemed by investors will be higher than the purchase cost. Similarly, limited partner fund investors also bear part of the profits and losses according to their subscription amount, so the redemption amount of investors may be different from their capital contribution.
Investors generally don't buy or sell stocks or limited partner rights, and hedge funds generally don't pay dividends until investors redeem them. Closed-end funds, on the other hand, either trade a small share, or pay dividends, or return the funds to investors at the end of the limited duration. Most hedge funds allow investors to redeem once a month or quarterly, and some can only redeem once a year or two.
separate account
If the assets held by a hedge fund cannot be reliably valued or the liquidity is relatively poor, but the fund itself is relatively easy to redeem, the fund can set up a "separate account". The Fund separates illiquid assets from the main asset portfolio, puts them into a separate account, and grants relevant rights and interests to investors. However, these rights or shares cannot be redeemed at any time. After the fund sells the assets in the "separation account", investors can redeem them and get the expected annualized income.
The purpose of setting up an independent account is to solve the problem of valuation when investors redeem stocks. If some assets cannot be valued or sold when investors redeem them, the fund cannot determine whether the redemption amount is calculated correctly. More importantly, it is possible that only the current assets of the fund can be sold to pay for the redemption of investors. If the value of illiquid assets after redemption by investors does not reach the expected level, all losses will be borne by other investors, and investors will not bear any losses. With an independent account, the fund can ensure that once the liquidity of related assets becomes worse, all investors will bear the same losses at this time, and the main asset portfolio can continue to accept subscription and redemption. Conversely, purchases in this period have the same problem.
Separate accounts are generally used as emergency measures. In September 2008, after the bankruptcy of Lehman Brothers, hedge funds set up independent accounts one after another to prevent funds from being unable to sell assets at market value due to the market crash.
Several special funds can also use separate accounts in their daily operations. For example, a fund investing in insurance products may transfer related securities to a separate account after a natural disaster. Once the compensation amount is evaluated, these securities can be valued relatively accurately.
Listed fund
Corporate funds are sometimes listed on small stock exchanges, such as the Irish Stock Exchange, so the regulatory requirements for investors are relatively low. However, the shares of these listed hedge funds are usually not traded on exchanges.
Fund listing is different from investment management company listing or initial public offering (IPO). Although the media reported it as "hedge fund IPO", the IPO of Fortress Investment Group is actually the listing of investment management companies, not the listing of hedge funds it manages.