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How to start a Hedge Fund

To incorporate a hedge fund, the promoter needs to set up the hedge fund entity. This can be either a mutual fund or an exempt company with variable capital.

The choice of the jurisdiction might be the first step in the process: whether in Luxembourg or in other well-known destinations within the industry, such as the Cayman Islands or British Virgin Islands.

There are a number of details which should be taken into account, such as whether the destination is a business-friendly environment; with a stable government, well-developed financial services laws, and well-organised civil/common law system. The tax system should provide exemption of corporate gains, income or withholding taxes of any nature. For all these reasons, many funds have selected Luxembourg, Cayman or BVI as their home.

Luxembourg Specialised Investment Funds are particularly suitable for hedge fund strategies.

The hedge fund – how to incorporate the investment company

The first step for the promoter is to prepare the draft memorandum and articles of association, which will be used to set up the company, and will conform with the offering documentation.
The second step is to draft the offering document which sets out the terms of the offering of the fund's shares (offering memorandum).
The third step is to incorporate the exempt limited liability company with the Registrar of Companies and register the fund with the CIMA.

The majority of funds are registered with CIMA under Section 4(3) of the Mutual Funds Law (2009 Revision).
Some funds may be exempt from registration. for instance if they have 15 or fewer investors.
The Registrar of Companies fees are set out below for the exempt limited liability company

The Hedge Fund Investment Management Company
It is not necessary to have a Cayman management company to manage the hedge fund.
Should the promoter not have a management company in Cayman, then the first step is to set up such a company.
Promoters may appoint an investment management company formed in another jurisdiction - this company can then be used as the management company.
A Cayman management company is typically established as an exempt limited liability company with the CIMA unless it qualifies for an exemption from registration.
An investment management company may seek exemption if the investment management company carries on its securities investment business exclusively for one or more of the following classes of person:

a sophisticated investor (this includes a fund registered with CIMA)
a high net worth person; or
a company, partnership or trust (whether or not regulated as a mutual fund) of which the shareholders, unit holders or limited partners are one or more persons falling within (1) or (2).

If the investment management company qualifies for an exemption, it will not need to obtain a licence for investment business.

Creatrust helps promoters, institutional clients and managers to establish their own hedge fund, and supplies corporate services and fund administration services to ensure efficient running of the vehicle.