What is the structure of hedge fund private placement memorandum?

Many business people set a goal for themselves to one day be in a position to have a hedge fund. In some people's minds, this is their coming of age in the investment world. Before we talk about the structure of the hedge fund private placement memorandum, you need to have a clear view of what a hedge fund is.

By definition, a hedge fund is an investment fund that is made available to a limited number of investors. Typically it has a combination of wide range of short term investment activities along with the longer term traditional. There is a broad range of investments for hedge funds that include but are not limited to shares, debts and commodities. Just like the name infers, hedge funds use a number of methods to hedge the risks; usually with derivatives and short selling. There are usually a specified list of criteria required for the investor thereby limiting the investment to only the wealthiest. The benefit for the investors beyond just potential increase in value is that they are exempt from some of the standard investment regulations. Hedge funds are not registered as investments and are therefore not under the jurisdiction nor governed by the Securities and Exchange Commission.

Starting a hedge fund is a fairly easy process, with only a few requirements. Getting a hedge fund (PPM) private placement memorandum is simply a partnership document drawn up with the assistance of an attorney and an accountant. It can represent an LP (Limited Partnership) or an LLC (Limited Liability Corporation). The document discloses the biography or history of the main participating personnel, all parties involved as well as the established trading strategies and risks that are involved. Additional information contained includes compliance with blue sky laws, the auditors (usually members of the participating personnel). The secondary documents are those that are signed by the partnership investors and are called subscription agreements.

The hedge fund private placement memorandum usually contains general information but does designate an adviser or management company. Typically, the adviser has a large personal investment in the hedge fund and are given authority to make investment decisions for the company. Since investors rely on the PPM for pertinent information, the PPM also conveys information on fund operations, expenses; losses and gains and potential tax areas of the investment. The more details that are included on a PPM the more that a potential investor may wish to participate. While there isn't a formal format for a PPM, many include such details as redemption rights and processes and potential conflicts-of-interests. The structure is a broader base line that might also include change in business directions for investors and soft dollar vs. hard dollar investments.

The PPM usually accompanies copies of financial statements which can entice new investors. It typically includes the fact that the exemptions offered via the hedge fund to the sponsors and the attorneys does not extend to the antifraud provisions under the federal securities law. This is a protection clause to protect the principals.

The information supplied in this article is not to be considered as medical advice and is for educational purposes only.