How to create a hedge fund in Russia and the USA

How to use your own capital effectively and make a profit are questions that every investor asks. And if the capital is quite solid, then not everyone will decide to entrust their funds to third parties. How to control your savings yourself, using the knowledge and experience of professionals for investment activities? The answer to this question is to create a hedge fund.

From the previous article, you learned what a hedge fund is, what it is for, and how it works. Now let's talk about how to create a hedge fund in Russia. I hope this article will be useful to those who are interested in building an effective money management system and at the same time want to maintain the confidentiality of their business.

How to create a hedge fund

So, if you want to be directly involved in managing your own assets, are looking for a way to protect them from risks, and are also interested in attracting outside investments, creating a hedge fund may be a suitable solution.

Unfortunately, there is not much experience in such investment activities in the Russian economy. However, there are quite successful examples given in the previous article, in particular, the VR Global Offshore Fund. You can rely on the experience of foreign investors, taking into account the specifics of Russian legislation.

By the way, government regulation of hedge funds in Russia is quite weak. For a long time, the legislation on the stock market contained practically no rules regulating this area. Only since 2008, certain requirements for the size of assets and their structure have appeared, in particular, the need for frequent revaluation. In accordance with the law, on at least 2/3 business days during the quarter, the estimated value of assets (excluding cash) must be at least 70% of the total value of the fund's assets. In other words, the hedge fund accepts funds, but they should not exceed 30% of the total investment.

Other structure requirements also contain standards for the percentage of assets. That is, the hedge fund accountant and auditor will definitely not be bored.

It is possible to open a hedge fund both in the territory of any country and in an offshore zone. In many countries around the world there is a hidden struggle against offshore companies: laws are being created that contain all kinds of restrictions. Most likely, tax-favored zones will exist for many years to come. If we talk about Russia, then tax rates in our country are quite humane compared to Europe and the USA. However, as long as there is talk about introducing a progressive taxation scale in the Russian Federation, offshore zones will be in demand among Russian investors.

First of all, you need to choose the type of hedge fund depending on the area of activity:

a private fund is suitable for you if the main goal is managing your own funds and making a profit;
an investment fund is the next step. If you plan to develop your fund, attract third-party investors, expand the areas of investment and the list of assets, and use the services of brokers, then a private fund can be converted into an investment fund;
professional foundation is the highest level. Such hedge funds work with professional investors: banks, mutual funds, investment companies.

Thus, everything depends on the amount of capital. Let me remind you: to create your own hedge fund in Russia, you must have funds in the amount of at least 3 million rubles.

Structure and types

Consider the structure of a hedge fund. Key participants:

Management Company. Takes on the functions of managing investors' money: develops a strategy, selects tools for its implementation, adjusts the strategy and gets results. Real professionals should work as managers. After all, they take responsibility for huge amounts of money, and investors expect high returns from them.
Investor is a legal entity or private investor who transfers money to the management of a management company. After the transfer nothing depends on him. The investor only receives his share of the profit in proportion to his share in the total capital.
The custodian bank is an intermediary between the management company and the investor. Accepts money from one party and transfers it to the other.
Prime broker is a technical executor of transactions with assets. It provides access to trading platforms, depository services, and margin lending. Large investment banks such as Goldman Sachs and Morgan Stanley play this role.
Administrator-auditor. Conducts mandatory audit of financial statements and assessment of fund assets. Conducts administrative work, communications with investors, preparation of reports, etc.

Hedge funds can be classified according to various criteria:

depending on the jurisdiction, for example, funds of the USA, Great Britain, Russia, offshore countries;
by type of investment strategy used;
by the amount of capital under management;
according to the degree of risk.

The International Monetary Fund distinguishes 3 types of hedge funds:

Macro funds - enter into transactions in a specific market based on a macroeconomic analysis of the situation in a given country.
Global – they work all over the world, conduct analysis at the micro level, i.e. they assess the attractiveness of a specific investment asset.
Relative value funds operate according to the classical hedging scheme, when transactions in different directions are simultaneously concluded to minimize risks.

Key Steps

Next, we will analyze the process of opening a hedge fund in the Russian Federation step by step.

Decide on the country of registration

When choosing a country for registering a hedge fund, you need to consider the following parameters:

convenience for investors;
taxation;
bank requirements.

As a rule, the cost of opening a hedge fund in an offshore zone is significantly lower than in another country. And the procedure for opening an offshore company itself takes less time than in the Russian Federation or, say, in Europe. It should be noted that hedge funds, as a rule, are not tied to any state. This means that you can attract investors from any country in the world and work with assets in any currency. But the requirements of Russian legislation must be taken into account.

Is it possible to open a hedge fund in Russia, meaning on Russian territory? Theoretically, yes. However, there is still very little such practice: most of the funds formed by Russian investors are registered offshore. Of the total number of hedge funds in the world, almost half have chosen the Cayman Islands as their jurisdiction. Panama, the British Virgin Islands and the Bahamas are also popular.

What is a hedge fund?

This is a special type of private investment fund, which is practically not limited by legislative regulation.
A hedge fund is not available to a wide range of investors. Only professional investors have the right to work there. Thus, American funds serve private investors with a down payment of at least $5 million. or institutional investors with a contribution of $25 million. Initially, hedge funds were created offshore to avoid regulatory oppression. Gradually, leading countries came to terms with the existence of funds and allowed them into their markets, however, with the conditions that they would not conduct an advertising campaign and would not work with non-professional investors.

The first hedge fund was created in 1949 by A.W. Jones. The idea came to him while working on an article in a magazine. He invested his money and the money of his friends not so much to enrich himself, but rather to create his favorite business. Although Jones himself was involved in social issues of poverty, he was also actively studying investment science. His strategy was to buy securities that were likely to rise in price, as well as take positions in securities that were likely to fall in price. This allowed us to reduce risks. Over 5 years, his strategy showed growth of 325%, which is much more than that of operating mutual funds. In the next few years, several dozen more funds were created that were classified as hedges.

There are currently about 12 thousand hedge funds in the world, managing approximately $3 trillion. It is difficult to estimate the exact amounts because the legal structure of the funds is confusing. The most famous is the J. Soros fund, which earned $1 billion. on the fall of the pound in 1992

How long does it take to open a hedge fund?

To roughly calculate how much time we will need, we need to highlight three main stages:

Preparation. This includes the choice of country, management company, legal form, and custodian bank. You also need to decide on the name of the hedge fund, prepare and collect the necessary package of documents.

We already know that if you create your own management company, the preparatory stage may take more than one year, because You will need to gain certain knowledge and experience, as well as pass certification exams.

Registration. The state registration procedure can take from several days to 2-3 months, depending on the type of hedge fund and jurisdiction. In popular offshore zones, as a rule, it can be done within 1-1.5 months.
Launch. You can be puzzled by the search for specialists (lawyer, broker, etc.) even at the preparation stage. Opening brokerage accounts takes several business days. Attracting investors is a task, the speed of which depends not only on you. In any case, you can and should start looking for investors already at the stage of state registration.

Thus, provided that the stages are combined, you can create a hedge fund and start working within an estimated period of 3 to 6 months. Now let's talk about how much it will cost.

Classification

Hedge funds can be classified according to the following criteria:

Working methodology: relative value companies, macro, global.
Type of investment strategy. Promotion/Demotion is one of the most popular options and needs no explanation. Market-neutral strategy - the fund invests in one economic sector, receiving income from the inefficiency of prices in the market, despite the direction of their movement at the moment. Emerging-market - investments in the markets of developing countries, etc.
The minimum limit of funds for entering the fund and the amount of remuneration for capital management.
Minimum investment period: short-term - up to 3 months; medium-term - from 3 months to 3 years; long-term - for 3 years or more.

How much does it cost to start your own hedge fund?

The cost of the procedure depends on several factors:

country of registration;
fund type;
management company (third-party or own), etc.

For example, if you decide to create a hedge fund in the United States, then the costs will be completely different than if your choice is a small private fund with jurisdiction in one of the popular offshore zones.

The table below provides an approximate list of expenses for two funds:

Fund 1: private hedge fund with Russian capital, registered in the Cayman Islands.

Fund 2: mid-sized American hedge fund, jurisdiction: Wyoming.

Name of costs	Cost, $
Fund 1	Fund 2
Business registration fee	500	750
Agency services (insurance, licensing, etc.)	2 500	5 000
Attracting investors (services of marketers and other specialists)	5 000	5 000
Office rent for 6 months	30 000	50 000
Salary of two employees (lawyer, financial service specialist) for 3 months	10 000	15 000
Cost of office equipment	5 000	5 000
Advertising expenses	1 500	2 500
Opening brokerage accounts	3 000	3 000
Opening bank accounts	4 000	4 000
Additional packages of documents with apostille	5 800
Amount to invest	40 000	1 000 000
TOTAL:	107 300	1 090 250

The cost of services is approximate and may vary depending on the individual wishes of the fund creator. However, the topic of our article is opening a hedge fund in Russia, and thus, you can expect that you can meet the amount slightly exceeding RUB 7,500,000. ($100,000 or 2,900,000 UAH).

In the future, provided that your business develops successfully, gradually increasing the volume of attracted investments, you have every chance of becoming the owner of an investment or professional hedge fund.

Advantages and disadvantages of opening a hedge fund

Let's look at the pros and cons of creating your own hedge fund.

Positive points:

Confidentiality. The activities of hedge funds are quite closed: information about profitability, the structure of investors and the size of transactions performed, as a rule, is not published in open sources. This to some extent helps to increase profitability, because There is less fear that competitors will use your unique strategy.
Ability to work with a wide range of financial instruments, open both long and short positions. This makes a hedge fund attractive to various categories of investors. In addition, the variety of trading operations carried out under the guidance of a team of professionals helps improve your reputation.
If a hedge fund is registered in an offshore zone, you save on taxes.

Where does this name come from?

Why was it given this name? Let's return to the founder of hedge funds, Alfred Winslow Jones, and more precisely to his investment strategy. This strategy consisted in the fact that he opened long positions (buy) in undervalued shares (with great growth potential) and at the same time entered into short sales in clearly overvalued shares.

Thus, during periods of economic growth, he profited from the growth of undervalued shares, and during periods of depression, from the fall in the value of overvalued ones. The simultaneous entry of both long and short positions was the main reason why the SEC assigned the prefix “hedge” to all funds of this type.

By the way, hedge funds currently operate using completely different strategies and have nothing to do with the concept of hedging.

Hedging is a trading tactic that involves opening multidirectional positions in different markets to compensate for losses in one of them and profits in another. Classic hedging involves opening positions on the derivatives market as opposed to positions on the spot market (for example, buying shares on the stock market is accompanied by selling futures on them on the derivatives market).

Moreover, the activities of hedge funds are often much riskier in nature than other types of investment funds.

Recommendations from the author

What can you recommend to a future hedge fund creator?

The entire preparation procedure and the first steps to open a fund should be thought out as much as possible in advance. Namely: jurisdiction, strategy, expected profitability, etc. Carefully study the legislation of the country in which you decide to register a hedge fund, the taxation system, and government regulation of investment activities.
When choosing a consulting company that will help you prepare the necessary documents, you need to approach it as responsibly as possible. Do not forget that any company seeks to make money on your ignorance or lack of experience. However, completing all the documents yourself will be difficult and time-consuming. Use the knowledge and experience of professionals, but keep your interests in mind. Having decided on the strategy and other key points, it is worth getting advice from a company specialist, then decide - perhaps you can perform some actions yourself, and entrust the rest to specialists.
When your first investors appear, be as honest as possible. You shouldn’t lower their expectations too much, but promising mountains of gold would be a mistake. Focus on the minimum return in the first year of the fund's operation. In subsequent periods, build a financial plan on the basis that your initial costs will pay off in the first year. All your forecasts must be supported by calculations - involve a financial planner for this.
Even if you decide to manage the fund through a third-party company, it would be a good idea to have a certificate as a stock market specialist. Or, at a minimum, take a training course on trading and the securities market. Even if you are well versed in the world of investments, any fresh knowledge can be useful to you when managing a fund.