A Guide to Starting Your Hedge Fund

Erik Serrano Berntsen is CEO of Stable Asset Management. Prior to Stable, he was a Consultant with Bain & Co., where he consulted on private equity deal studies as well as a broad spectrum of corporate engagements. During his time at Bain he was also an advisor to the Prince s Trust, including advising on the UK-wide Volunteer Strategy initiative. Erik holds a Bachelor of Arts in Politics, Philosophy and Economics from Keble College, University of Oxford, and a Masters of Business Administration with honours and a Concentration in Finance from the University of Chicago Booth School of Business.

John Thompson is Principal of Stable Asset Management. Prior to Stable, he was a senior executive of Enron Europe. He has held regulatory affairs and market operations management roles with Wintershall (BASF) and was regional financial coordinator for Milestone Petroleum (Burlington Resources). John began his energy career in the oil and gas fields of the Rocky Mountains and later as a well-site mud-logging engineer. John has held several Directorships, including Member of the Supervisory Board of the European Energy Exchange (EEX). John also holds a Masters of Business Administration from the University of Chicago Booth School of Business.

Stable Asset Management is a hedge fund seeding firm that backs top trading talent globally to build institutional quality asset management firms.

Successful hedge fund investing begins with well-informed strategy
 
A Guide to Starting Your Hedge Fund is a practical, definitive "how-to" guide, designed to help managers design and launch their own funds, and to help investors select and diligence new funds. The first book to examine the practical aspects of setting up and operating funds with a focus on energy commodity markets, this book scrutinises the due diligence process and comprehensively reviews the opportunities and risks of all energy commodity markets as hedge fund investments. Extensive planning and strategy advice prove invaluable to prospective fund managers and investors alike, and detailed discussion of the markets' constraints help inform procedural decisions. Readers gain insight into practical matters including legal and commercial structures, due diligence, fund raising, operations, and more, allowing them to construct a concrete investment plan before ever touching a penny.
 
Asset managers are looking to energy commodities to provide attractive uncorrelated - if volatile - returns. These high returns, however, are accompanied by high risk. Few investors have experience evaluating these investment opportunities, and few prospective fund managers understand the market fundamentals and their associated risks. This book provides the answers sorely lacking in hedge fund literature, giving investors and fund managers the background they need to make smarter decisions.
* Understand the markets' structures, opportunities, and risks
* Develop a comprehensive, well-informed investment strategy
* Conduct thorough due diligence with a detailed plan
* Examine the practical aspects of fund raising, legal and tax structure, and more
 
Oil has long been traded by hedge funds, but electricity, the fuels that generate electricity, and the environmental products like emissions allowances and weather derivatives have become the new "hot" investment strategies. These high returns come with higher risk, but A Guide to Starting Your Hedge Fund ensures participants have essential information at their disposal.

Acknowledgements ix
 
PART I Why This Book? 1
 
Chapter 1 Introduction 3
 
Why This Book? 3
 
The Big Picture and Energy Commodities 4
 
Case Study: Amaranth Advisors 5
 
Layout 6
 
The Beginning 7
 
Bibliography 7
 
PART II The Basics 9
 
Chapter 2 What Is a Hedge Fund? 11
 
I Already Know What a Hedge Fund Is 11
 
A Little Bit of History 12
 
So What Is a Hedge Fund? 13
 
Hedge Funds (Un)Defined 16
 
The Growth of the Hedge Fund Industry 18
 
Hedge Fund + Commodities = Commodities Corporation 19
 
Whither Energy and Commodity Hedge Funds? 20
 
Moving Forward 20
 
Bibliography 21
 
Chapter 3 What Are Energy Commodities? 23
 
Introduction 23
 
What Are Energy Commodities? 23
 
The Regionality of Electricity 25
 
Why Are Energy Commodities Attractive for Investors? 27
 
A Complex, Solvable Problem 30
 
Drivers of Complexity 31
 
Conditions for Solvability 36
 
Principal Sources of Opportunity and Risk 39
 
Bibliography 46
 
Chapter 4 Trading and Investing in Energy Commodities 47
 
Bottom-up and Top-down 48
 
Trading + Managing a Business = Successful Hedge Fund 49
 
The Edge? 50
 
Trading Energy Commodities 52
 
Basic Financial Knowledge for Commodities 55
 
Conclusion 56
 
Bibliography 59
 
Part III Starting the Journey 61
 
Chapter 5 The Business Plan: Implications and Applications 63
 
Introduction 63
 
Objectives and Uses of a Hedge Fund Business Plan 64
 
Conclusion 71
 
Bibliography 72
 
Chapter 6 Laws, Contracts, and Lawyers 73
 
Don't Kill Your Lawyer 73
 
Legal Basics for Funds 74
 
Master-Feeder Fund Structures 77
 
Side-Pocket Structures 81
 
The Firm 84
 
The Investment Advisory Agreement 86
 
Management Enterprise 87
 
Structural Design Decisions 88
 
Case Study: Complex Tax Structuring 98
 
Be Nice To Your Lawyer 103
 
Bibliography 104
 
Chapter 7 Service Providers 105
 
Introduction 105
 
Long-Term Relationship: Service Providers and Marriage 106
 
Service Providers: Who and Where? 107
 
Negotiate, Negotiate, Negotiate 108
 
Service? 110
 
How to Choose? 112
 
Final Thoughts 113
 
Bibliography 113
 
PART IV Running the Business 115
 
Chapter 8 Fundraising 117
 
Strategic Investor Portfolio Design 118
 
Start-up Lifecycle Analysis and Investor
 
Portfolio Development 127
 
Investor Acquisition - Marketing 130
 
Tools for Marketing and Key Marketing Documents 140
 
Marketing Documentation 143
 
Investor Maintenance - Investor Relations 152
 
Chapter 9 Operations and Infrastructure 155
 
Introduction 155
 
Infrastructure and Technology 158
 
Bibliography 160
 
PART V Final Thoughts 161
 
Chapter 10 Investing in Energy Commodity Hedge Funds 163
 
Asset Allocation: Portfolio Building Basics 163
 
Asset Allocation: Understanding Different Strategies 167
 
Checklist for Investing in Energy Commodity
 
Hedge Funds 170
 
Bibliography 171
 
Chapter 11 Quo Vadis 173
 
Bibliography 179
 
Appendix A Sample Business Plan Outline 181
 
Appendix B Outline of a Confidential Explanatory Memorandum: Sample Offshore Feeder Ltd 183
 
Appendix C Sample Due Diligence Questio

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