What are some common terms for forex hedge funds (forex commodity pools)?
Many forex managers who decide to start forex hedge funds have a great understanding of their forex investment strategy but are not quite sure what should be the terms of their hedge fund. This article will provide an overview of some of the more common terms for a forex hedge fund (fees, lock-ups, withdrawals, etc). As with any program a manager should not feel compelled to fit the terms of their specific program to these “common” terms.
Forex Asset Management Fees
Like traditional securities hedge funds, forex funds will charge a fee based on the assets under management. Because of the inherent leverage of some forex trading programs the manager will be managing “nominal” assets which are the total amount of assets under the managers control. The forex manager can charge the management fee on actual or nominal assets. You should let your attorney know which you prefer at the outset.
With regard to the actual rate, it is common for forex managers to have a 1% to 2% asset management fee. It is probably more common to see rates closer to 1%. Some managers may want to charge a 0% management fee and then a higher performance fee, but we would generally recommend against this for a few reasons.
Forex Performance Fees (or Performance Allocations)
Forex hedge funds also typically charge a fee based on the performance of the fund over a certain period of time. Unlike the management fee the performance fee is charged solely on gross profits – if the manager has a different method he should discuss this with the attorney. With regard to performance fee periods, it is common for forex funds to take performance fees either monthly or quarterly. The actual performance fee will vary widely – I have seen fees range from 15% to 35% and managers have also come up with “graduated” or “tiered” performance fee structures so that the manager will be compensated greater for the greater performance to the fund.
Lock-Up
The hedge fund lock-up provision has come under scrutiny lately as hedge fund performance in general has suffered and investors are forced to stay with losing hedge funds. The reason many funds choose to have a lock-up period is so that the manager will have sufficient time to institute his strategy. Oftentimes the strategy will be long-term in nature and thus the lock-up period is also long.
With the off-exchange foreign currency market, and the spot markets particularly, the investment strategy is often of a short duration. Accordingly, the lock-up period for funds with short duration investment strategies should be short or non-existent. I believe that the longest lock-up period I have seen for a forex hedge fund is 1 year. Typically the lock-up will be 6 months or 3 months.
Withdrawal Provisions
Because of the liquidity of the forex markets it is common to see investor-friendly withdrawal provisions. It is common for withdrawals to be allowed as of the end of the month on either monthly or 15 days notice. Less common is for withdrawals to be allowed on a quarterly basis. I have not seen a longer withdrawal period.
Other Provisions
Because each forex program is unique managers may decide to include special provisions which are applicable to their unique program. I have seen special initial fees, fees for early redemption, and pip sharing of pip rebate provisions. If you have a special need for your program, you should discuss this with your forex lawyer so that an appropriate provision can be drafted for the forex disclosure documents.
Please feel free to contact us if you have any questions on your specific forex investment program or if you would like to discuss starting a forex hedge fund. Other related forex legal articles include:
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