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.

• Acknowledgements ixPart I Why This Book? 1Chapter 1 Introduction 3Why This Book? 3The Big Picture and Energy Commodities 4Case Study: Amaranth Advisors 5Layout 6The Beginning 7Bibliography 7Part II the Basics 9Chapter 2 What Is a Hedge Fund? 11I Already Know What a Hedge Fund Is 11A Little Bit of History 12So What Is a Hedge Fund? 13Hedge Funds (Un)Defined 16The Growth of the Hedge Fund Industry 18Hedge Fund + Commodities = Commodities Corporation 19Whither Energy and Commodity Hedge Funds? 20Moving Forward 20Bibliography 21Chapter 3 What Are Energy Commodities? 23Introduction 23What Are Energy Commodities? 23The Regionality of Electricity 25Why Are Energy Commodities Attractive for Investors? 27A Complex, Solvable Problem 30Drivers of Complexity 31Conditions for Solvability 36Principal Sources of Opportunity and Risk 39Bibliography 46Chapter 4 Trading and Investing in Energy Commodities 47Bottom-up and Top-down 48Trading + Managing a Business = Successful Hedge Fund 49The Edge? 50Trading Energy Commodities 52Basic Financial Knowledge for Commodities 55Conclusion 56Bibliography 59Part III Starting the Journey 61Chapter 5 The Business Plan: Implications and Applications 63Introduction 63Objectives and Uses of a Hedge Fund Business Plan 64Conclusion 71Bibliography 72Chapter 6 Laws, Contracts, and Lawyers 73Don’t Kill Your Lawyer 73Legal Basics for Funds 74Master–Feeder Fund Structures 77Side-Pocket Structures 81The Firm 84The Investment Advisory Agreement 86Contents viiAttributes and Variations of the Investment Management Enterprise 87Structural Design Decisions 88Case Study: Complex Tax Structuring 98Be Nice To Your Lawyer 103Bibliography 104Chapter 7 Service Providers 105Introduction 105Long-Term Relationship: Service Providers and Marriage 106Service Providers: Who and Where? 107Negotiate, Negotiate, Negotiate 108Service? 110How to Choose? 112Final Thoughts 113Bibliography 113Part IV Running the Business 115Chapter 8 Fundraising 117Strategic Investor Portfolio Design 118Start-up Lifecycle Analysis and Investor Portfolio Development 127Investor Acquisition – Marketing 130Tools for Marketing and Key Marketing Documents 140Marketing Documentation 143Investor Maintenance – Investor Relations 152Chapter 9 Operations and Infrastructure 155Introduction 155Infrastructure and Technology 158Bibliography 160Part V Final Thoughts 161Chapter 10 Investing in Energy Commodity Hedge Funds 163Asset Allocation: Portfolio Building Basics 163Asset Allocation: Understanding Different Strategies 167Checklist for Investing in Energy Commodity Hedge Funds 170Bibliography 171Chapter 11 Quo Vadis 173Bibliography 179Appendix A Sample Business Plan Outline 181Appendix B Outline of a Confidential Explanatory Memorandum: Sample Offshore Feeder Ltd 183Appendix C Sample Due Diligence Questionnaire Outline 189Index 195