ccm - launching an alternative investment fund

Launching an aLternative investment Fund

CONCEPT CAPITAL MARKETS, LLCMEMBER FINRA, NFA AND SIPC

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aPriL 2015

cOmPrehensive sOLutiOns FOr investment managers

2 | Launching an Alternative Investment Fund For Institutional Use Only


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TAbLe OF COnTenTs

InTrOdUCTIOn 3

deveLOpIng A bUsIness pLAn 4

ALTernATIve InvesTmenT FUnd ChOICes 5

Incubator hedge Fund 6

domestic hedge Fund structure 7

Offshore hedge Fund 8

side by side structure (Onshore & Offshore Funds) 9

Onshore/Offshore master Feeder structure 10

separately managed Account platform 11

1940 Act – Liquid Alternative mutual Fund structure 12

UCITs Fund structure 13

Insurance dedicated Fund (IdF) structure 14

ChOOsIng servICe prOvIders 15

Legal & product structure Overview 16-18

Accounting: Audit & Tax 19

Fund Administration 20

prime broker 20-22

Middle Office Solutions 22

Compliance Consultant 23

business Insurance 23

IT Infrastructure 24

Office Space 24

Employee Payroll & Benefits 24

marketing/Capital raising 25

marketing Collateral 25

sUmmAry 26

COnTACT Us 26

AwArd wInnIng prIme brOkerAge pLATFOrm 27

ImpOrTAnT dIsCLAImer 28



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InTrOdUCTIOn

starting your own alternative investment fund is a formidable undertaking, and while it can be an exciting and lucrative endeavor, it will require a great deal of thought and careful planning. Concept Capital markets, LLC (“Concept Capital”) has been involved in new fund launches for many years and has played a key role in getting a large number of managers started as well as helping them navigate their various growth phases. Our experience suggests that when investment managers make the right decisions early on, it dramatically enhances their success rate.

making the right decisions can mean many things, but it must begin with the development of a sound business plan. This will not only help the manager articulate his investment strategy and process, but importantly also understand the various costs that he’ll need to incur to establish and manage a sound business. It also means making the effort to investigate the key service provider options and selecting those that will match the manager’s needs over the life of the business.

At Concept Capital we believe the alternative investment industry will continue to expand in coming years. This view is driven by the continuing flow of talented investment managers eager to strike out on their own and the increasing capital allocations finding their way to emerging managers. The latter is a reflection of the long track record of better returns generated by this group compared to their much larger counterparts.

Our firm offers emerging managers a comprehensive set of solutions ranging from extensive pre-launch consulting, to custody, clearing and execution, to post-trade and ancillary operational support, portfolio and risk reporting, and office infrastructure and IT support. As our client, you will benefit from our seasoned team, our client-centric service model, our extensive market expertise, and our top-tier technology platform. we will be a partner to you in your new venture, facilitating your launch in a timely manner and assisting you in the development of your marketing and growth plan.

As you no doubt consider other service providers in the marketplace, before you make any final decisions we urge you to talk with us. we believe we bring several key differentiators to our offering. First, our founders were hedge fund managers themselves, understand what it’s like to manage both an investment portfolio and a business, and have led the development of the firm’s solutions from the user’s perspective. Second, new fund launches have been a focus of our firm for more than a decade, and we can deliver to you the benefits of the enormous amount of experience we’ve gained over this time frame covering all aspects of setting up a new fund. And finally, the breadth of our offering is unmatched in the marketplace, as we’ve outlined above.

we have created this booklet to serve as a guide to the key issues involved with launching an alternative investment fund. We hope you find it a useful tool, and look forward to the opportunity to work with you on your upcoming launch. we wish you and your partners the best in your new endeavor.

sincerely,

concept capital Prime services team



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deveLOpIng A bUsIness pLAn

when starting a new business, you’ll want to develop your “game plan” in the form of a detailed business plan. by writing a detailed business plan, you and your partners increase your odds of succeeding as entrepreneurs. It will not only help you articulate your investment strategy and process, but importantly also understand the financial undertaking you’ll be committing to in order to establish and manage a business that is institutionally sound.

writing a business plan is an excellent way to determine whether or not the idea of starting your new business is feasible. A business plan can save you a great deal of time, effort and money if, after completion, it reveals that the business model is just not feasible. however, if the idea is feasible, the business plan will help you map out your prelaunch stage, as well as your first few years of operation.

developing a business plan will also ensure that you focus on the operational functions, including front, middle, and back office, as well as the financial objectives of the business using conservative revenue/expense estimates. As part of the Concept Capital business Consulting practice, we assist prospective entrepreneurs with a prelaunch & multi-year budget to be used within their business plans.

your business is dynamic and will change as the months and years go by. you will want to revise your business plan as you set new goals. review the business plan periodically to see what goals have been accomplished, what changes need to be made, or the new direction(s) your company’s growth should consider taking.



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There are a number of legal issues to consider when deciding how best to structure your fund management business. Complying with applicable laws is important throughout the entire process, both prelaunch and after the fund/business is up and running. The primary laws affecting the investment industry are:

The securities Act of 1933. This statute was enacted as a direct result of the market crash of 1929. The legislation had two main goals: (1) to ensure more transparency in financial statements so investors can make informed decisions about investments, and (2) to establish laws against misrepresentation and fraudulent activities in the securities markets.

The securities exchange This statute regulates the trading, purchase, and sale of securities, including investment company shares. The 1934 Act also regulates broker-dealers, including investment company principal underwriters and others that sell investment company shares, and requires them to register with the seC.

The Investment Company This act regulates the structure and operations of investment companies through a combination of disclosure requirements and restrictions on day-to-day operations.

The Investment Advisers This act defined the role and responsibilities of an investment advisor. It advocated the regulation of those who provided investment advice.

The dodd-Frank The dodd–Frank wall street reform and Consumer protection Act, commonly referred to as “Dodd-Frank”, was passed as a response to the late-2000s financial crisis, it brought the most significant changes to financial regulation in the United states since the regulatory reform that followed the great depression. It was put in place to promote the financial stability of the United States by improving accountability and transparency in the financial system, to end ‘‘too big to fail’’, to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes.

Alternative Investment The Alternative Investment Fund managers directive (“AIFmd”) is a european Union directive that entered into force on 22 July 2013. The directive regulates: eU fund managers that manage alternative investment funds (essentially hedge funds and private equity funds) (“AIFs”) (wherever they are based); fund managers (wherever they are based) that manage AIFs established in the eU; and fund managers(wherever they are based) that market the units or shares of an AIF in the eU.[1]

Jumpstart Our business The JObs Act was intended to encourage funding of Us small businesses by easing various securities regulations.

LegaL & PrOduct structure Overview

whether or not you are starting a brand new business, or have an existing business to which you would like to add a new product, the summary below should give you some insight into the types of structures to consider.

Please note that the following summary of alternative investment fund choices is for illustration purposes only. It is very important that you consult with your legal counsel before you determine a final plan as there may be wide ranging regulatory requirements for each structure individually or in the aggregate.

ALTernATIve InvesTmenT FUnd ChOICes

Act of 1934.

Act of 1940.

Act of 1940.

wall street reform & Consumer protection Act of 2010

Fund managers director of 2011

startups Act of 2012



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This structure is ideal for portfolio managers who are looking to incubate their investment strategy with their own personal capital for a set period of time (e.g. 6-24 months) to build a track record. Once a successful track record has been established, the manager can reach out to a wider audience of prospective investors in the hopes of raising enough capital that would warrant incurring the costs associated with a traditional hedge fund structure.

incubatOr hedge Fund



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The domestic structure allows for investment by Us-based taxable investors. These funds typically have language built into their private placement memorandums (ppm) that allow for the conversion to a master-feeder structure. There are generally three legal entities created to act as the Investment manager (Im), the general partner (gp), and the Fund itself. The Im and gp are often established as a Limited Liability Company (LLC) in delaware, and the Fund is often established as a Limited partnership (Lp) in delaware. The Im collects the asset based management fee (e.g. 1%-2%) and the gp collects the incentive fee allocation (e.g. 20%).

dOmestic hedge Fund



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OFFshOre hedge Fund

The choice to set up an offshore hedge fund structure is often determined by the geographic location or the type of investor that is looking to invest in your fund. Offshore investors are often located outside of the United states or are Tax-Exempt US investors, like a qualified pension plan. Often an offshore fund will be established as a corporation or a limited liability entity in a tax-favored jurisdiction like the Cayman Islands, the british virgin Islands, bermuda, Ireland or Luxembourg.



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side by side structure (OnshOre & OFFshOre Funds)

In this structure, Us taxable investors will invest in the domestic partnership and the Us non-taxable investors (e.g. qualified pension plan) and offshore investors will invest in the offshore fund. When trades are made, the investment manager can direct the prime broker(s)/custodian(s) to allocate trades between the two funds in parallel. by having the side by side structure, there is often slippage between the two funds, and the split account setup can cause greater operational inefficiencies versus having a master feeder structure.



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OnshOre/OFFshOre master Feeder structure

most popular amongst hedge fund managers, this structure allows for the management of one pool of capital for the investment manager, as the onshore and offshore funds act as “feeders” into the Offshore master Fund. All portfolio positions are held in the master Fund, while the feeders hold shares in the master. This structure allows for greater efficiency for the manager and the investor, which is why it has gained such popularity over the years.



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seParateLy managed accOunt (sma) PLatFOrm

smAs have become an increasingly popular mechanism for investors to allocate to hedge funds since the financial crisis of 2008, which led to funds erecting gates and suspending redemptions, and the massive frauds that were perpetrated on investors for years, most notably the madoff scandal. Investors demanded a structure which would allow them to invest in hedge fund strategies but would not be commingled in a fund with other investors. smAs provide them with continued control of their assets and complete transparency of the advisor’s activity, and the liquidity to disengage from the sub-advisor on very short notice. (e.g. same day)

Concept Capital markets, LLC comprehensive, real-time technology offering, allows each smA to be viewed on its own, but also in the aggregate if funds are allocated to multiple managers, essentially providing a complete portfolio view. The investment manager executes trades into an average price account and the allocation of those trades across all the smAs takes place in a pre-determined fashion.



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1940 act – Liquid aLternative mutuaL Fund structure

This structure allows hedge fund strategies to be packaged into mutual fund structures for broader distribution into the “advice channels” of registered Investment Advisors (rIAs), traditional Financial Advisors and wire-house brokers. The structure allows affluent clients and smaller pension and endowment funds that are prohibited by their charter from investing in private placements to efficiently invest in alternative investments. This is currently the fastest growing segment of the hedge fund industry and is gaining popularity with existing managers looking to add to their product mix, and also with large mutual fund companies purchasing alternative investment firms.



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ucits Fund structure

Defined as the “Undertakings for Collective Investment in Transferable Securities” or UCITS, are a set of European directives that are aimed at allowing commingled investment pools to operate freely throughout the european Union (eU) on the basis of a single authorization. Although not an apples-to-apples comparison to a 40 Act – Liquid Alternative mutual Fund structure, there are many similarities, especially in the broader distribution of the UCITS fund through the advice channels and affluent individuals throughout the EU and Asia.



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insurance dedicated Fund (idF) structure

Insurance dedicated Funds (IdF) have been gaining popularity in the last few years as new, higher income tax rates have been imposed in the United states. The insurance structure allows high net worth individuals, family offices and/or corporations to invest in alternative investment funds on a more tax-efficient basis, and thus receive the benefits of compounding interest. The two IDF structures that are widely used are the Private Placement variable Annuity (ppvA) product and the private placement variable Universal Life Insurance (ppvUL) policy.

There are three basic rules for Insurance dedicated Funds (IdF):

1. It must be structured in the legal format prescribed by the Irs, typically a limited partnership that accepts money only from life insurance companies through their ppvUL and ppvA Investment Accounts.

2. It must be broadly diversified as articulated by IRC Section 817(h). no more than:

n0 55% of the IdF’s assets can be allocated to any one fund or security n0 70% to any two funds or securities n0 80% to any three funds or securities n0 90% to any four funds or securities

3. It must observe the Investor Control doctrine. Under the Investor Control doctrine, the manager of the IdF may not be influenced, directly or indirectly, by the PPVUL and/or PPVA Investment Account owner with respect to the selection of funds or securities to fulfill the investment mandate of the fund.



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After selecting the alternative fund structure you will establish, the next step is to choose the service providers that will help you execute your plan. service providers include legal counsel, auditors/accountants, fund administrators, compliance consultants, business insurance providers, IT and infrastructure solutions firms, CRM providers, employee benefits servicers, and of course, prime brokers. As a new organization, and with a relatively low asset base, it is widely expected and accepted in the investment community that many of the key functions in your business will be outsourced. Outsourcing or “co-sourcing” is a less expensive and more efficient route by which to implement best practices throughout your organization.

In selecting a service provider it also important to consider that you are also selecting an adviser. This trusted adviser must understand your business and have the resources and industry-specific knowledge to guide you through each stage of your business’ life cycle.

In choosing service providers, you’ll want to keep the following in mind:

name brand Investors generally demand that their fund managers have high-quality service providers that are well-known throughout the industry and are considered a “check-the-box” (in DDQs) firm.

breadth of services: In addition to providing their core competencies (e.g. audit, tax, administration), it makes sense to inquire about other services offered at the firm. This will provide a sense of the depth of the organization.

Client base: Industry leaders typically have substantial practices dedicated to the alternative investment industry. key statistics include the number of alternative investment clients, assets under management (AUm) or assets under administration (AUA), which, when compared to other providers may indicate where this provider stands in the service provider food chain.

Industry knowledge You can learn a lot about a service provider’s qualifications by talking to others who are current and former clients of the firm. Reading articles and white papers written by members of the firm can also provide a sense of the industry knowledge and experience that resides in the firm.

Technology when researching service providers, it’s important to understand the technological capabilities they possess, and how that compares to their competitors. you’ll want to make sure the firm you select has made the requisite investments to be able to provide you with state-of-the-art technology solutions.

ChOOsIng servICe prOvIders

recognition:

and experience:

Capabilities:



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If you choose a traditional domestic hedge Fund structure, you will need to create the following three entities: general partner (“gp”), Investment management Company (“Im”) and the Fund. The gp and Im are often organized as Limited Liability Companies (LLC). The gp engages the Im through an Investment management Agreement (ImA) to manage the Fund. The Im is paid the asset based management Fee, generally 1%-2%, and the General Partner receives the Incentive Allocation, often 20% of net new profits. Both the GP and IM entities will have an Operating Agreement which outlines the key business and economic terms amongst the founding partners of the organization.

The Fund’s offering documents will comprise a private placement memorandum (ppm), Limited partnership Agreement (LpA), and subscription documents. while drafting your fund offering documents with legal counsel, there are key issues to consider when determining the Fund’s Investment Terms. some of those terms are outlined in greater detail below:

minimum Investment: For a new launch the minimum investment will generally be listed between $500,000 - $1,000,000. The fund’s private placement memorandum (“ppm”) will often contain language that allows investors to become a Limited partner in the Fund for a lesser amount than the stated minimum at the “general partner’s discretion.”

management Fee: An asset based fee charged on a monthly or quarterly basis and is generally between one percent (1%) and two percent (2%).

Incentive Allocation: The incentive allocation is a performance-based fee that is a calculation of net new profits during a particular period, which is derived from a combination of realized and unrealized gains of the Fund’s assets. The incentive allocation for most hedge fund managers in the industry is twenty percent (20%).

Founders Class: This term outlines a popular discounted fee structure seen in recent years that serves to induce investment into the Fund during earlier years when capital is needed most to build the Fund’s track record, and in turn a sustainable business. The speed at which a manager attains critical mass will often determine the outcome as a going concern. The founders’ shares or share class are often determined by the Fund reaching a minimum asset level (AUm) or a particular period of time.

As an example, a Fund might have a traditional fee structure with a two (2%) percent management fee and a twenty (20%) percent incentive allocation (often called “2 and 20”) structure. The manager has determined that critical mass to operate its business efficiently is $75 million in AUM. The following is an example of how a Founders Class might be outlined in the ppm:

Class A: Fees of 1% and 10%, for the earlier of raising $25mm AUm or six (6) months, whichever comes first, which would trigger a closing of the share class to any new investor.

Class b: After Class A has expired, fees of 1.5% and 15% for the earlier of raising an additional $25mm AUm, for a total of $50mm AUm, or twelve (12) months, whichever comes first, which would trigger a closing of the share class to any new investor.

Class C: After Class b has expired, fees of 1.75% and 17.5% for the earlier of raising an additional $25mm, for a total of $75mm AUM, or six (6) months, whichever comes first, which would trigger a closing of the share class to any new investor.



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most new funds will need to post a two year track record before they can begin to attract real institutional interest. The above schedule outlines the asset level goals and a discounted fee structure to induce investors to invest “now” and “early”. After all the above classes have been closed, all new investors that come in would do so at the 2% and 20% fee structure offered in the ppm.

subscription dates: This outlines the frequency of accepting new investors into the fund. (e.g. monthly, quarterly)

Lockup: There are two types of lockups that are generally used by Investment managers, including a hard Lockup and a soft Lockup.

hard Lockup: A term that will preclude an investor from having the ability to withdraw a partial or full amount of their Capital Account prior to a minimum period (e.g. 1 year) under any circumstances.

soft Lockup: A term that would allow an investor to make a partial or full withdrawal of their Capital Account within the stated period. (e.g. 1 year). For this right the investor will often pay an “early withdrawal penalty” to the Fund of between two and five percent.

gaining popularity in the aftermath of the 2008 Credit Crisis and the subsequent “gating” (see below) or “suspension of redemptions” of investors by many hedge funds, investors have demanded that more favorable terms be provided by their hedge fund managers.

redemption notice: Often a redemption notice period is 30-90 days prior to a redemption date.

redemption period: This time frame allows the Fund to raise cash in an orderly fashion so as not to disadvantage the remaining investors when accommodating redemptions monthly, quarterly, bi-annually, or annually.

Choosing a proper redemption period is critical to the investment strategy. The asset classes used in the strategy, underlying liquidity of the securities and average holding period are key factors in making this decision. There is a delicate balance between providing investors with liquidity and providing cash stability to the manager in the early years of managing the fund.

For example, a Fund that invests in illiquid, distressed bonds which have an eighteen (18) to thirty six (36) month holding period would not want to use a soft lockup, monthly liquidity with a thirty (30) day written notice. In this scenario, the Fund should have a hard lockup of at least one year and then offer quarterly or biannual redemption, with 45 day written notice. Conversely, a Fund that trades very liquid, large cap Us equities could offer a soft lockup, and then offer monthly redemptions with 30 day written notice.

gate provision: A restriction placed on investors in a hedge fund limiting the amount of aggregate withdrawals from the Fund during a particular redemption period. The “gate” is predetermined and is fully disclosed in the Fund’s ppm. The purpose of the gate is to prevent a “run on the fund,” as a large number of simultaneous withdrawals from the Fund could force the manager to sell off significant portions of positions, and in



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turn negatively impact the remaining investors in the Fund. when a gate is imposed, investors typically participate pro-rata in the aggregate redemption amount on the successive redemption dates until their request is filled.

seC registration: A fund manager based in the United states must register with the seC as an investment adviser if it has more than $110 million in gross assets under management, or at least $30 million in the case of an adviser based in new york or wyoming. There is an exemption for a manager who only acts as adviser to one or more private funds with aggregate gross assets of less than $150 million, and who does not have any separate managed account clients.

CFTC registration: A manager of a fund that trades futures or certain kinds of swaps may need to register with the (CFTC) as a Commodity pool Operator (CpO) or Commodity Trading Advisor (CTA). registration may also be applicable to funds which invest in other funds that trade commodities and futures (e.g. fund of funds). Certain exemptions to registration exist, however, the CFTC rules are complicated and you should consult counsel to determine whether you need to register.

Please note, the previous pages outlining the legal considerations for starting an alternative investment fund should be used for illustration purpose only. Once you identify and retain legal counsel, it is very important that you consult with your legal counsel regarding all aspects of your fund management business so they may provide the best advice possible in a collaborative environment with fund management.



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accOunting: audit & tax

During the prelaunch stages, you will work closely with your accounting firm and law firm to review all aspects of the fund’s formation and legal structure. Among others, the following services will be provided by your accounting firm:

Audit: The year-end audit of the Fund’s operations and preparation of financial statements in accordance with accounting principles generally accepted in the United states (gAAp) or International Financial reporting standards (IFrs).

Tax: The year-end tax preparation for the Fund, which would allow for efficient distribution of k-1 statements to the Fund’s investors. A tax return will also need to be prepared for the general partner and Investment management entities and a k-1 statement distributed to each of the partners in the business.

estate planning: estate planning prior to launching is recommended. Creating the estate plan structure prior to launch, while the business has little or no value instead of sometime in the future when the business could be worth considerably more, could have considerable tax consequences.

The accounting firm you choose should have the following capabilities:

Staffing: You’ll want to inquire about the firm’s employee turnover and confirm that the firm is experienced in alternative investments. Firms with professionals and resources specifically dedicated to the alternative investment space are better suited to service your firm, answer your questions quickly and accurately, and offer trusted advice. No firm is immune to attrition or turnover, but firms with professionals dedicated to the industry make the transition less painful.

Access to senior You are looking for a firm with accessible practice leaders, and assurance that the first time you speak with the engagement partner during the proposal process will not be your last. Inquire about each team member’s roles and responsibilities as they relate to key deliverables and ask for references from current clients.

Thought Leadership: The firm should provide you with timely “market intelligence” on a variety of topics as well as “plain-english” advice and practical strategies that affect key components of your business. These may include the following:

n0 The most beneficial federal tax elections;

n0 Utilizing certain trading tax strategies to minimize tax implications;

n0 state and local tax issues and developments;

n0 Impact of ever-evolving GAAP and financial statement disclosure requirements.

Technology expertise: Technology plays a significant role within your investment management organization, and when used correctly by an accounting firm can improve overall efficiency and the timely delivery of the annual audit and tax preparation documents. Technology expertise, coupled with technical expertise, is the combination you should be looking for in an accounting firm.

practice Leaders:



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Fund administratiOn

In choosing a fund administrator, you will want to choose a firm that has the breadth of experience in working with all types of investment strategies and that can service different asset classes on a global basis. many fund administrators will provide a comprehensive, turnkey solution for new launch managers including, but not limited to:

n0 new Client Onboarding

n0 Online reporting portal

n0 shareholder services

n0 portfolio reporting

n0 performance Calculations

n0 Technology

n0 Investment manager reporting

n0 record keeping for the Fund

Use of Technology: similar to accounting, fund administration is a critical part of daily operations. A vertically integrated technology architecture with the processes for accounting, p&L attribution, and reporting will provide operational efficiencies and ensure a timely net Asset value (nAv) calculation for investors.

daily reconciliation The administrator receives files from the prime broker(s) daily and produces a static set of reports once per day based on overnight batch processes. daily reconciliation of the Fund’s cash and securities will allow for a more efficient month-end NAV calculation process and is considered a “best practice” by institutional investors. many administrators also offer what is generally referred to as “admin light,” which is a less costly option that reconciles only at month end, though this often creates bottlenecks and can delay the delivery of nAvs.

process:

Prime brOker

There are a number of key services that a prime broker provides to investment managers that help facilitate their investment strategy and growth of their business. because an investment manager is trading securities on a daily basis, the prime broker often is the main cog in the wheel of the service provider relationships.

prime brokers generally offer the following services: custody and clearance, execution, securities lending and financing, and portfolio reporting. Some also offer more extensive services, such as portfolio/risk analytics and capital introduction, while others, through affiliates also provide middle and back office services, and IT and office support. When considering your prime brokerage options, it’s important to investigate each firm’s capabilities and how the respective offerings match your specific anticipated needs. Following is a more detailed description of these services as they are offered by Concept Capital.



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Custodian Options: Concept Capital offers its clients multiple custodian options. This is an important consideration for investment managers as the capabilities of the different firms may be better suited to certain investment strategies or asset classes. moreover, the availability of multiple custodians under one client service platform provides managers the opportunity to diversify their fund’s counterparty risk. The introducing broker (Ib) service model offers investment managers of all sizes access to top-tier global clearing firms that serve as the custodian for their funds. This is a particularly valuable service to emerging managers, who generally launch with smaller amounts of capital and consequently may not be able to engage such firms directly. Through the introducing broker model, Concept Capital markets, LLC introduces the investment manager’s funds to the custodian(s) for custody and clearance, but provides all of the execution solutions, back office operational support, and portfolio reporting directly to the manager.

Concept Capital currently has clearing and introducing agreements with:

n0 pershing, LLC, a subsidiary bank of new york mellon

n0 merrill Lynch pierce Fenner & smith (broadcort)

n0 merrill Lynch professional Clearing Corp.

n0 Industrial and Commercial bank of China Financial services, LLC

n0 Adm Investor services, Inc.

execution Concept Capital offers clients a suite of electronic execution platforms with leading liquidity algorithms along with a complete, “high touch” outsourced trading option. Clients have the flexibility in trading in the following asset classes: Global Equities, ETFs, Options, Fixed Income, Futures and Foreign exchange.

securities Lending: Concept Capital, through its extensive relationships with its clearing firms and its technology solutions, allows clients to source securities at competitive rates. we also work with our sources to make hard-to-borrow securities available.

reporting: Concept Capital provides investment managers with daily portfolio reporting through static reports delivered electronically or through its proprietary, web-based client portal. This reporting capability is based on the firm’s Advent Geneva accounting installation, widely considered to be the “gold standard” in hedge fund accounting systems, which combined with its proprietary technologies, serves as a repository of a fund’s aggregated activity from all of its custodians and across all of its asset classes and currencies. This capability integrates all reconciled data from multiple sources, including order management, global custodian, administrator, accounting, and custom data, and produces real-time and end-of-day portfolio and risk analytics reports.

business Consulting The principals and key managers of Concept Capital have extensive experience as both investment managers and service providers. we understand your business and can help develop and implement solutions across all of the key areas of your business. Our goal is to not only help you launch quickly and efficiently, but to assist you in building a successful asset management firm that will stand the test of time.

services:

Prime brOker

Capabilities:



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middLe OFFice sOLutiOns

At Concept Capital, we can provide a daily Middle Office solution that will allow investment managers to have an independent daily workflow of the following items:

n0 Trade capture n0 Trade confirmations

n0 Trade settlement support n0 reconciliation of trades

n0 resolution of trade errors n0 position reconciliation

n0 valuation reconciliation n0 Liaise with “away” brokers

n0 Corporation actions n0 shadow books & records

n0 month-end recon with administrator

As an emerging manager, outsourcing your middle/back office operations to a high quality partner takes care of the daily tasks and will allow you to focus on your core competencies of managing a portfolio and generating returns. because institutional investors require a clear separation of duties between the investment management team and operations, it is generally acceptable to outsource the middle office function during the early days of a new manager’s business, as the lower asset base makes internalizing this function excessively expensive in terms of personnel and technology.

real-time portfolio: Concept Capital offers clients Omnihedge, a real-time, dynamic interface that allows managers to monitor important portfolio and risk metrics. Among the capabilities of the system are the following:

n0 real-time viewing of portfolios both separately and in an aggregated manner, regardless of where each account is held in custody;

n0 Real-time positions, profit/loss, and attribution information in dollars and basis points;

n0 real-time exposure based on absolute and notional position values (delta adjusted);

n0 Customizable alerts delivered in real-time to desktop or mobile device;

n0 “grouping” capability is available on individual securities, groups of managers, sectors, strategies, and a wide range of adjustable criteria;

n0 Stress testing of portfolios against significant events;

n0 multiple asset classes, including equities, options, futures and bonds subject to live pricing.

Client service: Concept Capital is a boutique prime broker that is “right sized” to meet your needs as an emerging manager and provide you the necessary services as you grow and mature as an organization. each client is assigned a dedicated relationship manager, client service representative/operations representative, and trader to service their account.

research: Concept Capital offers clients daily research notes on global markets.



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cOmPLiance cOnsuLtant

new fund launches may not immediately require manager registration with a regulatory body, though the dodd Frank revisions for the Investment Advisers Act of 1940 prescribe reduced asset thresholds to trigger registration requirements. However, sophisticated high net worth individuals, family offices and institutional investors are increasingly looking for an investment management firm to maintain a “culture of compliance” whether the manager is registered or not.

The primary role of a compliance consultant is to organize and implement compliance policies and procedures, as well as encouraging best practices for employees to follow. generally, the consultant is brought in for the purpose of creating an overall compliance program for the firm. The consultant will outline the role of the chief compliance officer (CCO) and provide a second level of oversight to monitor the work that the CCO and the firm’s management team perform to manage compliance risk.

Engaging a compliance consultant provides numerous benefits to an investment manager’s business:

n0 The expense of compliance is not nearly as costly as the potential cost of non-compliance. by having a culture of compliance, mandatory seC audits should go smoothly and the firm should avoid costly penalties and the distraction to your business that may result.

n0 Compliance builds credibility and is attractive to investors. The more sophisticated the investor and the larger the potential investment allocation, the more demanding the investor will be in all areas, including compliance.

n0 An integral component of growing one’s business is protecting the business along the way and providing a path for development. A compliance consultant will point out the activities and deliverables that need to be produced for compliance reasons. On an ongoing basis the consultant can also address and remove many regulatory impediments to the business’s growth plans.

business insurance

A sound insurance program is standard in the normal conduct of business and a significant element of the operations profile of all reputable investment professionals.

Look for the following signals that your insurance broker service team matches your needs for:

n0 extensive market knowledge and insurance carrier relationships

n0 Claims resolution expertise

n0 Ability to develop multi-year strategy

n0 Ability to advise on internal insurance related issues (premium allocation between manager and fund)

n0 Ability and willingness to deal with issues large and small

For new launches, basic coverage(s) with lower premiums are cost-efficient alternatives. Examples include a business-owners policy (“BOP”), or a package policy covering office contents and general liability (which are likely required by a landlord if you lease office space). As assets grow and the business matures, institutional investors will require you to have directors’ and officers’ liability (D&O), errors and omissions (E&O) or other more focused professional liability policies.



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it inFrastructure

emerging hedge funds should design a technology platform with the help of service providers to run all IT in the most cost-effective manner available. Firms should have the flexibility to host any application, the scalability to add resources as needed and the assurance that their data is always available, secure and protected. some of the items to consider are listed below:

n0 network services

n0 hosted and archived email services

n0 Telecommunications services

n0 disaster recovery/business Continuity plan

n0 personal Trading monitoring

Through our affiliate, Concept Capital Administration, LLC, we can provide these IT solutions on a contractual outsourced basis.

OFFice sPace

Depending upon the size of your organization, there are basically two options for office space.

Executive Office Suite: A short-term option that provides a furnished office suite, conference room, kitchenette, telephone and high speed internet. The rental term is generally one year. When investigating this option, you should look for a facility with the space flexibility that can accommodate your growth.

permanent space: Longer-term options are either a sublet or a direct lease with a landlord. rental terms are generally between three to seven years. many spaces are pre-built and may be furnished from the prior tenant. There are a number of key considerations when selecting this option, and we recommend engaging a reputable commercial real estate broker who knows the market, landlords, key terms and how to execute a deal.

Through our affiliate, Concept Capital Administration, LLC, we can, depending on availability, provide office space solutions in certain locations on a contractual basis.

emPLOyee PayrOLL & beneFits

depending upon the size of your organization, there are some key components as it relates to employee payroll and benefits, including health insurance, 401k plan, group life insurance and commutation expenses. To attract higher quality employees, you may need to offer such programs and to be able to properly administer them.

A popular strategy for small business owners to implement a compliant payroll and benefits package is through the use of a professional employer Organization (“peO”). A peO is an organization that provides an integrated and cost effective approach to the management and administration of the human resources function. The peO assumes employer risk of its clients, by contractually assuming substantial employer responsibilities and risk, through the establishment and maintenance of a co-employer relationship with the client’s employees.

A peO establishes a contractual relationship with its clients whereby the peO:

n0 pays wages and employment taxes of the employee out of its own accounts;

n0 reports, collects, and deposits employment taxes with state and federal authorities.



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new and emerging fund managers will need to clearly articulate their investment strategy and investment process, and summarize the management team’s capabilities. building a relationship with the investment community is a key component to an investment firm’s growth.

marketing and Investor relations are two different roles and should be treated as such. marketing is about networking with qualified prospects and converting them into investors. Investor relations applies post-investment and is focused on retaining investor capital in the fund(s).

Components of your n0 Identify appropriate potential investors by type (HNW individuals, family offices, fund of funds, pension/endowments, etc.), geography, and risk/return appetite;

n0 pre-qualify investors, conduct initial meetings, and concentrate on those potential investors with the highest probability of closing;

n0 educate potential investors on the value proposition of your fund;

n0 Clearly articulate your investment strategy, investment process and summarize the team’s capabilities;

n0 With their permission, add each qualified prospect to your monthly distribution list so they can be kept up-to-date on the firm and the fund’s performance;

n0 be prepared with due diligence questionnaires and for onsite visits, reference checks, and operational due diligence review.

due diligence The ddQ is a new manager’s most important marketing tool since it contains a detailed description of strategy, risk limits, hedging disciplines, performance history, investment terms, investor concentration, biographical information of the team, basic counterparty information, and much more. The Alternative Investment management Association (AImA) has a quality template that can be used.

pitch book: For initial discussions, the pitch book/marketing deck provides a summary of the ddQ and highlights the firm’s qualitative and quantitative characteristics. It should be no more than about 25 pages.

monthly Tear sheet: A one-page tear sheet can be used for monthly reporting and marketing if it contains a summary of the investment strategy, monthly net performance, risk/reward analysis, peer group analysis, benchmark analysis, current AUm, service providers and contact information.

Quarterly Investor The quarterly investor letter provides a history of performance and supporting commentary; additionally, a quarterly conference call with a brief Q&A can give investors added insight and can be an efficient use of the investment team’s time.

Crm system: many new managers track prospective investors by using microsoft excel (“excel”). excel can be an inexpensive tool, but it only organizes input data, it is not an interactive tracking tool, that will be needed as both your organization and investor database grows. Traditional Crm systems manage contacts and track communications with current and prospective investors. Today’s hedge fund-specific CRM systems enable investment management firms to consolidate multiple layers of the business efficiently. These platforms combine traditional CRM, investor relations and account management, and streamline reporting capability.

marketing effort:

marketing/caPitaL raising

Questionnaire (ddQ):

Letter:

marketing cOLLateraL



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concept capital markets, LLcmember Finra, nFa, siPc Prime services group

To learn more about our Concept Capital and our prime services platform, please visit: www.conceptcapital.com

To contact us, please e-mail us at: [email protected]

we have created this booklet to serve as a guide to the key issues involved with launching an alternative investment fund. We hope you find it a useful tool as you navigate the planning, and ultimately, the launch of your fund. We look forward to the opportunity to work with you, and wish you the best in your new endeavor.

summary

cOntact inFOrmatiOn

n0 1010 Franklin Avenue, suite 303 garden City, ny 11530

n0 1345 Avenue of the Americas, 3rd Floor new york, ny 10105

n0 10 glenville street, 3rd Floor greenwich, CT 06831

n0 2400 broadway, suite 220 santa monica, CA 90404

n0 13010 morris rd, 6th Floor, bldg 1 Alpharetta, gA 30004

n0 2301 rosecrans Ave, suite 4195-b el segundo, CA 90245

n0 2 manhattanville rd., suite 205 purchase, ny 10577

n0 42 north swinton, suite 2 delray beach, FL 33444



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award winning Prime brOkerage PLatFOrm

“best boutique Prime broker”

– hFmweek Us hedge Fund services Awards

“award for excellence & consistecy in Prime brokerage client service”

– global Custodian 25th Anniversary Awards

“top scores in multiple categories”

– global Custodian prime brokerage survey

“best boutique Prime broker”


“best north american Prime broker”

– hedgeweek global Awards

“top rated Prime broker” in 4 categories, including north america, managers with aum under $100 million, single strategies, and multi strategies”

– global Custodian prime brokerage survey

“best Prime broker north america”

– hedgeweek Us Awards

“highly commended” in the best boutique Prime broker – Overall category


“best north american Prime broker”

– hedgeweek global Awards

"Top Rated"� awards for prime services to funds with <$100mm, as well as a "Top Rated"� award for Multi-Strategy Funds and prime brokerage in North America.

“top rated” awards for prime services to funds with <$100mm, as well as a “top rated” award for multi-strategy Funds and prime brokerage in north america.

2011 2011

2012

2013 2013

2014

2014

2015

2013

2014

2014

2012

“Best Boutique Prime Broker – Client Service” - HFMWeek US Hedge Fund Service Awards.

“best boutique Prime broker – client service” – hFmweek Us hedge Fund service Awards

“top Prime broker in north america“

– global Custodian



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imPOrtant discLaimer

The information contained herein is based on sources believed to be reliable; however, we do not represent that this information is accurate, current, or complete and it should not be relied upon as such. Opinions, estimates, and projections within represent the individual author‘s personal opinions, and should not be construed as the opinions or investment strategy of Concept Capital or its affiliated companies, share-holders, directors, officers and/or employees. Such opinion is subject to change without notice. This material does not take into account the particular investment objectives, financial situation or needs of individual investors. before acting on any advice or recommendation in this material, the investor should exercise independent judgment as to whether it is suitable to his/her particular circumstances and, if necessary, seek professional advice

no part of this material may be reproduced, copied or duplicated in any form or by any means, or redistributed, without Concept Capital‘s written consent. Concept Capital Markets, LLC is a registered broker dealer with the securities and exchange Commission (seC) and a member of the Financial Industry regulatory Authority (FInrA) and nFA. All rights reserved. FOr InsTITUTIOnAL Use OnLy.

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