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Start up Hedge Fund Managers Launching Forex Hedge Funds

Recently a start up forex hedge fund manager located in Canada inquired, stating that he would like to deal strictly with US persons, have offices in Canada and select a forex broker in Switzerland who is not registered with the National Futures Association (NFA), Commodity Futures Trading Commission (CFTC) as a Futures Commission Merchant/Retail Foreign Exchange Dealer (FCM/RFED).

In commenting on this we note that under these circumstances, there are a number of considerations that the startup hedge fund manager intending to launch such a forex fund should consider.

Clearly, the start up forex fund manager needs to become aware of the potential regulatory requirements of the jurisdiction wherein he intends to operate. Generally these jurisdictions have government agencies that are responsible for overseeing regulated activities, such a securities, commodity/futures, forex and the like. Specifically if the new hedge fund manager intends to conduct any regulated forex business from Canada, there is likely a required registration in the Canadian province wherein the start up hedge fund manager intends to operate. Moreover evidence of proficiency, i.e., an examination, may be required. And, should the fund sell to Canadian investors, regulatory compliance is required in the jurisdiction where the investor is located.

With regard to non US registered Forex brokers/counter parties and US investors and/or operations, unless the Forex pool qualifies as an “Eligible Contract Participant,” it will be required to execute trades only with an NFA/CFTC registered FCM/RFED.

A commodity pool is generally an Eligible Contract Participant if it has $5 million in total assets and is formed by a person subject to CFTC regulation (or a foreign person subject to foreign regulation), provided that for purposes of retail forex transactions, each participant in the pool must be also an Eligible Contract Participant.

Individual is an Eligible Contract Participant where that individual is one with “amounts invested on a discretionary basis” in excess of $10 million, or $5 million if hedging.

The CFTC’s further definition of Eligible Contract Participant provides, however, that the pool participants are not required to be Eligible Contract Participants, if the pool:

  1. Is not formed for the purpose of evading regulation by the CFTC;
  2. Has total assets exceeding $10 million; and
  3. Is formed and operated by a registered commodity pool operator or by a commodity pool operator who is exempt from registration as such pursuant to Rule 4.13(a)(3)2.

For more information on how to start a hedge fund, contact us via E-mail info@turnkeyhedgefunds.com or (888) 263-4774.

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