In the ever-changing landscape of financial markets, fund managers are increasingly seeking ways to diversify their investment strategies. This exploration often leads them into uncharted territories, prompting a reevaluation of their traditional investment focus. Whether it involves branching into new sectors or integrating primary and secondary market strategies, fund managers are navigating complex landscapes to maximize returns. In this dynamic environment, a comprehensive understanding of the distinctive terms associated with different types of funds becomes crucial for successful fund formation and operation.

In response to this imperative, our quick analysis offers a concise yet insightful comparison between Private Equity and Venture Capital (PEVC) and hedge funds. By illuminating the primary terms that shape both categories of funds, this exploration equips fund managers with the knowledge needed to confidently navigate the intricate realms of PEVC and hedge fund investments.

PEVC	Hedge fund
Legal form
Limited Partnership	corporate type fund
Most closed-end funds use limited partnerships	Most closed-end funds use limited partnerships
Domicile
Cayman, BVI, Hong Kong, Singapore
These are mainstream fund sites; but securities funds appear to be more offshore
Fundterm
Commitment period + investment period +exit + extension. E.g. 5+2+1	Can be perpetual
Dealing Frequency
subject to the fund closing arrangements	Monthly open subscription (or other frequency)
Subscription Days
During the commitment period	Normally the first business day of the subsequent month
Redemption
this is not applicable for a PEVC fund	normally on a monthly or quarterly basis
	Lock-up period can be adopted e.g.6 months, 12 months, etc
Deadline for redemption applications
N/A	Application should be submitted before the monthly or quarterly dealing days
Distribution
Upon underlying project exit and return is realized	dividend distribution is allowed and performance fees areaccrued on amonthly or quarterly subject to the HWM
capital contribution
Contributionmadeaccording to the capital call	DirectTTpayment of the subscription amount
	100% of the total subscription amount (and other subscription fee). The administrator sends the "Subscription Confirmation Letter"
initial offering period
PEVC funds may have several rounds of fund financing (closing) before the official closing period, recalculating the LP equity (equalization / rebalancing),	‘Initial offering period’ can last for a week to months where the fund accept subscriptions from initial investors.
Main fundfees
Management fees Carried interest	Management fees Performance fee
Hurdle rate
8% (is more commonly seem in market practice)	Yes but it is not very popular
Number ofinvestors
Minimum one LP and subject to limitation as per its jurisdiction’s regulations	the fund only launches when there is an investor. Some jurisdiction has no upper limited on number of investors
Lock-up period
N/A as it is a close-ended fund	Common have 6 months, 12 months lock-up period
Governing laws in Cayman
Privatefund law	Mutual fund law
Minimum fund valuation frequency
annually	quarterly (however, monthly valuation is more common)
Fund directors
Limited partnership fund has no directorsdue to its nature however the GP company will have to appoint director(s)	Normally two individualdirectors
license of the GP/IM
normally the GP is not licensed in its jurisdiction	Normally a HK type 9 licensed manager
Exemption of fees
side letter	Exemption or relief by board resolution
Investor reports
- Quarterly Report (Management Report) - Capital account report （Capital Account Statement） - Audited annual financial statements	Monthly net worth report（NAV Statement） Audited annual financial statements

Additionally, it is highly recommended to consider the below in relation to your fund set-up:

1. launching your fund via existing fund platform or newly setup ?

In the vibrant financial landscape of Hong Kong, the option to launch your fund through an existing fund platform or by establishing a new one presents a pivotal decision. Numerous institutions, already armed with licenses from the Securities and Futures Commission, operate within established Hong Kong fund structures. Opting for these existing frameworks expedites the launch of new sub-funds. However, it's crucial to note that the fund's highest governing body, typically the fund's board, remains primarily overseen by the fund operator. Collaborating on aspects like designing fund terms, implementing significant fund changes, and managing risks requires ongoing coordination with the fund operator.

Launching through an existing fund platform offers advantages and drawbacks. On the positive side, it streamlines the process, saving time on drafting entirely new fund documents. Access to sophisticated service providers is facilitated through the established fund platform, expediting tasks like bank account opening applications. However, there's a caveat: since sub-funds operate under the umbrella of the main fund structure, all fund terms are subject to approval by the platform operator. This approval process may impose certain limitations on specific terms, necessitating careful consideration of the implications involved.

 

1. Are Both Close-Ended and Open-Ended Funds Subject to the Same KYC Requirements?

Although the fund structures differ, the KYC/AML (Know Your Customer/Anti-Money Laundering) requirements for both close-ended and open-ended funds are consistent."

a) Identity documents for fund directors (e.g., passports).

b) Proof of address for fund directors (e.g., bank statements, utility bills).

c) Identity documents for the ultimate controller.

d) Proof of address for the ultimate controller.

e) Corporate documents for any company holdings.

f) Resumes of the fund's anti-money laundering compliance officer.

Note:

1) Funds require a minimum of two natural person directors.

2) Documents must be notarized by lawyers or notaries public.

 

3. Bank Account opening

According to current banking requirements, either the "operator" or the "investment advisor" in securities fund structures are preferred to be regulated in its jursidiciton, e.g. holding license from the Securities and Futures Commission in Hong Kong (e.g., Type 4 or 9 licenses). Fortunately, some banks now offer online witnessed signature programs if signatories cannot be physically present in Hong Kong.

 

4. Anti-Money Laundering Compliance Officer

Under the Cayman Islands Monetary Authority (CIMA) Anti-Money Laundering Regulations, both registered funds and asset management companies in or registered in the Cayman Islands must appoint individuals to act as anti-money laundering compliance officer (AMLCO), money laundering reporting officer (MLRO), and deputy money laundering reporting officer (DMLRO). MLRO and DMLRO must be two different natural persons.

In principle, the AMLCO should meet the following requirements:

- Sufficient compliance experience

- Direct communication with the fund's board

- Adequate resources for fund compliance monitoring

- Access to information sources for AML audits

 

DMLRO and MLRO must meet the following criteria:

- Independent compliance positions

- No vested interest in underlying investments

- Authority to review fund documents to detect suspicious transactions

The positions of anti-money laundering compliance officers are not just nominal; they need to regularly obtain specific information from the fund or the administrator for multifaceted compliance assessments. Thus, individuals in these roles must be well-versed in Cayman compliance requirements and the above-mentioned criteria.

5. Registering with CIMA (applicable to Cayman funds)

Funds cannot be issued until they have completed the appropriate CIMA registration. Generally, a Cayman attorney completes the CIMA registration application, and it requires at least the following documents:

 

1) Offering documents (PPM/Supplement for hedge funds or LPA/Term Sheet for private equity funds)

2) Confirmation of the appointment of the fund's administrator

3) Confirmation of the appointment of the fund's auditor

4) Other CIMA registration forms and board resolutions

5) Corporate registration documents

6) Information for the anti-money laundering compliance officer

7) Completion of director CIMA registration

8) Affidavit

 

6. Timeline

In summary, the timeframes are generally similar for both. Certain types of private equity funds, such as specialty funds, may have shorter establishment times due to their simpler structures and terms. However, hedge funds may take longer, up to 2-3 months, involving aspects such as fund term design, bank account setup, brokerage account setup, and custodian account setup.

 

Last but not least, Precision Fund Services is experienced in administering both PEVC and hedge funds. Please feel free to reach out to our team to explore potential solutions."