how to read an offering prospectus

A hedge fund prospectus is a formal document that provides details about an investment offering. 

The hedge fund prospectus can help qualified accredited investors make more informed investment decisions because it contains relevant information about the investment or security and the strategy. Most hedge fund offering documents consist of the following set of documents: Private Placement Memorandum, 

Subscription Agreement, and Limited Partnership Agreement.

The crux of your hedge fund offering is your Private Placement Memorandum (PPM). Within your PPM contains the following important topics:

• Summary
• Directory
• Introduction
• Investment Activities of the Fund
• Management Company of the Fund
• Administrator
• Auditor
• Risk Factors

This is the way I typically prepare offering documents for my clients which are ALWAYS reviewed by one of my qualified securities attorneys depending on each situation and jurisdiction.

The Summary

Your Summary will contain the Name of your Fund and Name of General Partner/Investment Manager

Directory 

The Directory located in your PPM consists of all the names and contact details of your service providers to the fund. The following include:

• Registered Office
• Auditor
• Administrator
• General Partner
• Investment Manager
• Prime Broker
• Bankers and Custodian
• Fund and General Partner Legal Counsel

Introduction

The introduction portion consists of an overview of your fund. The overview of your PPM addresses the name of the fund, its address and contact person. It also should describe your fund offering. It also states that only accredited investors should be qualified to invest in your hedge fund.

Investment Activities of the Fund

This section describes your investment strategy and approach as well as your risk management pertaining to operations. 

Hiring an experienced hedge fund consultant, like Frank Nagy Financial Services will greatly reduce the burden of setting up your hedge fund. A good consultant will make the appropriate introductions to fund administrators, auditors and attorney’s that will help your hedge fund grow.

Management Company of the Fund

This section states who is the manager of your fund and where is it located or domiciled. It also addresses that you, the General Partner, will have exclusive control over day-to-day operations of your fund. 

Administrator

Pursuant to your administration agreement between your fund and the Administrator, this section will address the duties of your administrator. 

Your administrator will perform administrative, accounting and clerical services to your fund as well as providing AML/KYC due diligence on each prospective investor.

Auditor

Your hedge fund auditor will evaluate and audit your administrator’s financial reports. Once completed, the report will be provided to your investors.

Risk Factors

You will identify the risk factors associated with your trading strategy to your prospective investors. The risk factors should be brief and generic and do not have to apply to all funds and trading strategies. 

Subscription agreement

Your hedge fund subscription agreement is a contract to become a member/partner/shareholder investor in a limited partnership or corporation.

The subscription agreement requires the potential investor to divulge financial information relevant to his suitability to invest in the hedge fund. 

It should also state the amount of capital your potential investor will invest in your fund.

Contact us to learn more about starting a Hedge Fund.