As a hedge fund startup, you'll want to limit your personal liability as much as possible to mitigate possible risks in the future. The best way to do this is through a PPM that outlines the provisions about liability and indemnification, including the identification of the hedge fund manager. As you begin to learn how to include personal liability in a PPM, you’ll want to know some of the challenges of doing this, as well as overall financial and personal responsibility should the value of the hedge fund change suddenly.
Legal issues can pop up if a hedge fund sinks instead of increases in value. When a hedge fund fails, if not most investors may request a redemption, i.e. their money back on a stock or bond, hedge fund managers may have to dissolve the fund altogether. This could lead to time in court if investors feel their money hasn’t been returned in a timely fashion. All of these possible scenarios are related to overall financial and personal responsibility, which should be clearly written into the initial PPM to potential investors.
Here are a few things to consider:
Financial liability: A good PPM should outline how much you’d be on the hook for should the hedge fund investment underperform.
Legal liability: What do you owe to your investors, and what are their legal expectations of you in terms of protection of their investment?
Personal liability: Ensure that you won’t have your personal assets, including your house, car or other items, at any kind of risk.
What’s a hedge fund -- and hedge fund manager -- to do? Having a clear PPM can solve a lot of headaches before they even start.
In a typical PPM, the General Partner and any other General Partners and affiliates carry limited liability, and are even indemnified against any liability. But there’s no indemnification from liability from the following, which can also be read in the PPM example below: fraud, gross negligence, willful misconduct, the violation of Federal of state securities laws or any criminal wrongdoing. Bottom line: those involved in a hedge fund deal are good until they willfully break laws.
With these liability-conscious items in mind, you and your investor team will have a clearer picture on your responsibilities, and how to move forward. your investors will get more than a limited look at your company: They’ll be able to see the whole picture.
For more information on creating a solid PPM that covers your liabilities, visit PPM Templates: https://hedgefundppm.net/
Disclose your liabilities to investors using a well drafted #PrivatePlacementMemorandum. #indemnification #disclosuredocuments #PPM #InvestorDisclosure #RegD #506RegulationD #InvestmentOffering #HedgeFundDocumentation #StartupHedgeFund #hedgefundliability #InvestmentFundLiability