Starting a Forex Fund
By Hannah M. Terhune, Esquire 2008©, This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
Capital Management Services Group

Market conditions have never been better for setting up a forex fund. The number of forex funds and corresponding investors has grown as a result of expanding customer markets. Therefore, traders interested in starting a forex fund (or managing customer accounts) should familiarize themselves with the legal landscape as they consider earning a living in this profitable retail industry. An experienced and disciplined forex fund manager can earn a substantial income. Most forex funds to which we provide services are small.

We often
encounter people who have been trading accounts for others "under the table" and now want to formalize their arrangements. One key advantage to starting a forex fund is that the fund manager can legally accept compensation for his or her trading and advisory services. In many cases, the fund manager can
legally advertise their services as well. This compensation can provide an excellent supplement to an existing income or it may allow trader to work as a paid forex adviser on a full-time basis. In our experience, many forex new fund managers also keep their "day jobs" for a while until they are certain this is the business they want to be in. Market conditions have never been better
for setting up a forex fund. Whether you want to set up a fund or just invest in one, it is a good idea to understand the basics.

Is Running a Fund Profitable?
 Forex fund managers typically demand management fees of
1% to 2% of assets under management (AUM) as well as performance fees of 20% of net gains a year. This income can be substantial. If you had a mere $2 million AUM and a 1% management fee and a 20% performance fee, you would have management fee income of $140,000 ($2 million x 1%) and (assuming fund performance of 30%) performance fee income of $120,000 ($2 million AUM x 30% performance = $600,000 x 20%). If you had $5 million under management, you would have combined fee income of $350,000. If you had $1 billion
AUM, you would have $60 million in combined fees (assuming fund performance of 20%)
.
Forex Fund Risks. Funds are not for the thin skinned; there are many real risks. In this era of global mood swings, all bets are off. Money invested in a forex fund must truly be discretionary. A fund is only as good as its advisers, so the human risk is significant. Greed and ego often trump integrity and ethics.
Due Diligence. In 2008, there is also a noticeable trend toward increased review of funds by investors and counter parties (e.g., prime brokers, fund administrators, and auditors). Fiduciaries have a duty to perform due diligence to ensure that a fund's investment decisions are sound and
compatible with their client's risk profiles. Prospects may submit a due diligence checklist tomanagement, requesting extensive information covering every major aspect of the fund's
 organization, operation and management. Prospects may seek meetings with the officers of the fund and other persons significantly involved in the fund's business.

How does a forex fund work?
 A forex fund requires infrastructure in the form of corporate entities. In the United Sates, we use a limited partnership as the fund and use an S corporation (or
LLC) as the general partner (and forex adviser to) of the limited partnership. When set up outside the United States, both the forex fund and its advisor are set up as corporations in a low or zero tax country or other jurisdiction.

Managed Accounts.
A CTA (commodity trading adviser) manages individual accounts, while a
CPO (commodity pool operator) manages a fund (also called a "pool"). In our experience, many people lose interest in a managed account business when they experience the administrative hassles of managing separate accounts. However, some choose to be both.

Advertising and Attracting Investors. Unless listed on a recognized securities exchange, a forex fund cannot advertise to solicit new investors in the fund. A forex trader managing accounts, however, can advertise his or her managed account services. A few countries have rules similar to those of the United States in this regard. Prospective investors in the fund like to see that you have invested your own capital in the fund. It is also a good idea to show prospects
that you take fees subject to a hurdle rate, which means that you earn fees only when trading profits exceed a minimum percentage. An investor in a forex fund should be sophisticated enough to understand the risks associated
with forex trading. Many investors would be interested in forex funds if they had the opportunity. Because advertising of the fund and any other non-personal communications are prohibited, and the media has touted the risks over the benefits, investors must be sought in more direct and creative ways. A trader may find that in addition to family and close friends, many  colleagues and casual acquaintances may be potential investors. If you are interested in getting
investors for your fund, your selling efforts must be personally directed toward investors who are known to you. Advertising and any other non-personal communications are prohibited. For the forex trader who wants to trade for his family and friends, this is obviously no problem at all. Since the forex fund is an ideal vehicle to pool the resources of a small group of investors, forex
funds can be especially appealing.

How do I set up a forex fund?
 In 2008, forex traders remain positioned to launch a forex fund quickly without much red tape. In short, starting a forex fund means hiring a legal adviser with
the proper expertise to prepare the required documents and provide you with tax and regulatory advice. You will have to work closely with your lawyer to prepare the private placement
memorandum (PPM), fund's limited partnership agreement, and subscription agreement. A forex fund can be developed and launched within 2 weeks (on an expedited basis) but the normal development time is about 4 weeks. Offshore funds, while they can be incorporated quickly, take a little longer to establish due to the time required to open a bank and brokerage account for the fund.

Favorable Tax Treatment.
There are two ways to trade foreign currencies and they have different tax rates. “Foreign currency contracts" are taxed by Internal Revenue Code Section 988.
Currency futures, otherwise known as “regulated futures contracts” are taxed under Section 1256. Forward contracts and over-the-counter options in other traded currencies for which there is also trading in regulated futures qualify as "Section 1256 contracts." Gains from futures trading are taxed at a blended rate of 60% long-term gains and 40% short-term gains (regardless of how long a position is held). This 60/40 split gives futures traders an advantage over forex
traders. While the long-term rate is capped at 15%, the short-term (or “ordinary”) rate can go as high as 35%. The maximum blended 60/40 rate is 23%.
Forex gains are taxed at the short-term (“ordinary”) rates. Forex traders do not necessarily have to live with the higher "ordinary income" tax rates as they can “elect out” of ordinary income tax rates. Traders who do this will have their currency positions treated as Section 1256 contracts, and their gains will be taxed at the blended 60/40 rate. In addition, the fund will most likely
qualify as a "trader in commodities" so that investors are able to deduct the fund's expenses.

Securities Act of 1933.
 Forex funds are private and are not required to report returns, unlike
mutual funds that are publicly traded and post their net asset values daily. In the United States, private (hedge) funds are unregistered securities offered as a private placement under the Securities Act of 1933. Also, in the United States, a forex fund is a Regulation D (Rule 506) offering in that it is an unregistered security offered as a private placement. Regulation D provides a safe harbor that exempts the private offering from compliance with the registration
and prospectus delivery requirements of U.S. securities laws. However, Regulation D does not exempt an offering from compliance with the anti-fraud provisions of the law. You must supply all investors in your fund with offering documents (also called "disclosure documents") disclosing comprehensive information about the fund.

Commodity Exchange Act.
The Commodity Exchange Act (CEA) gives the Commodity Futures Trading Commission (CFTC) limited anti-fraud and anti-manipulation jurisdiction over
off-exchange (also called over-the-counter or OTC) foreign currency futures and options transactions. "Forex transactions" are leveraged off-exchange foreign currency transactions
where one party is a customer. The term does not include transactions that result in actual delivery within two days or that create an enforceable obligation to deliver between parties who are capable of making and taking delivery for business purposes.

Must I register with the CFTC?
If you plan to trade currency futures contracts, currency futures options, or forward contracts, your fund must be approved by the CFTC. In addition, you
must register with the National Futures Association (NFA) and become a CPO. The CEA defines a commodity pool as an "investment trust, syndicate or similar form of enterprise operated for the purpose of trading commodity interests."

CFTC Exempt.
A person who operates a commodity pool must register as a CPO unless an
exemption applies. If you operate a pool that limits its trading solely to forex and only trades with authorized counterparties, it is not required to register as a CPO, but may do so voluntarily. Forex managed account managers are generally not required to register with the CFTC or become Members of NFA. Understand that any NFA Member forex dealer that services your customer accounts, or you introduce accounts to, is subject to NFA enforcement action for your
conduct should your conduct violate NFA requirements. Violations can mean disciplinary action against your dealer even if it acts diligently and has no knowledge of your conduct. As a result, there is a trend among forex dealers to require NFA registration of forex traders managing customer accounts (including a fund). NFA compliance rules address the general issues of following just and equitable principles of trade and avoiding fraudulent behaviors.

Commodity Pools.
 If your forex fund trades in commodity futures or interests, it is also a commodity pool and you are a CPO. Any person who is involved with the commodity pool must register as an associate of the CPO. A registered CPO is required to provide a detailed disclosure statement (the prospectus) to prospective participants in the pool. Your Disclosure Document must also be filed with the NFA at least 21 days prior to the delivery of the documents to a
prospective participant and updated often. There are exemptions from the CPO registration requirements.

Investment Adviser Registration.
 If you plan to execute more than an occasional equity trade in your forex fund, you might also have to register as an investment adviser. If you manage less
than $30 million, you are not eligible to register with the SEC (unless you are based outside the United States or you are based in Wyoming) but are subject to applicable state law. Each state has its own registration requirements.

Offering Documents.
 Investors in your fund must receive all material information about the
offering and the offering documents should be provided to all investors. Any investor who is not an accredited investor must have sufficient knowledge and experience in financial and business matters to be able to evaluate the merits and risks of your hedge fund. Since the PPM usually is the starting point for those conducting due diligence, it remains a crucial document.

Accredited Investors.
 Regulation D limits the number of non-accredited investors to 35. Generally, accredited investors includes persons whose net worth (or joint net worth with that person's spouse) exceeds $1,000,000, or whose income was in excess of $200,000 in each of the two preceding years (or, together with that person's spouse, in excess of $300,000 in each of the two preceding years) and who reasonably expect to reach the same level of income in the current year. There are numerous other categories of accredited investors.

Performance-based Compensation.
 Performance-based compensation for fund advisers are paid as an allocation of profits, typically 20%, associated with the growth of the fund. There are
state regulations regarding performance based fees and these regulations vary considerably. In some instances, the compensation agreement specifies that funds be only paid when the profits of the fund exceed a hurdle rate.

Blue Sky.
Within 15 days of the first sale of your offering, an SEC Form D Notice of Sale must be filed with the SEC. Your fund must also comply with state blue-sky laws. In most states, Form U-2 must be filed.

Conclusion.
 Forex funds are about making money and running a forex fund is a great way to do so. The desire to pool assets in a way that is proper, both from a business and a legal standpoint, has led many forex traders to start their own forex funds. For a successful forex trader, a forex fund is an efficient, legal, and professional way to trade your own money along with the money of those who want to benefit from your expertise. No longer just for the elite, forex funds will continue to grow in varying financial conditions because of their complete market freedom.
The private investment fund industry has years of success ahead of it. Talented forex traders will find profitable outlets for their skills, regardless of government regulation. Forex funds are about making money and running a forex fund is a great way to do so.

Investment Adviser Registration and Regulation

By Hannah M. Terhune, Esquire 2008©, This e-mail address is being protected from spam bots, you need JavaScript enabled to view it

Capital Management Services Group

Who Must Register? If you have $30 million or more under management but have advisedfewer than 15 clients in the past 12 months and you do not hold yourself out as an  investment advisor (meaning that you are not actively seeking more clients), you may not have to register with the SEC in Washington, DC. However, most likely, you will have to register with your home state securities commission as an investment advisor. Each state in the United States has varying laws and regulations applicable to investment advisors.

Starting an Offshore Fund

By Hannah M. Terhune, Esquire 2008©, This e-mail address is being protected from spam bots, you need JavaScript enabled to view it Management Services GroupMany countries are competing against each other to provide the best playing field from a legal standpoint for private investment (hedge) funds. For a new, low budget offshore fund, Anguilla or the British Virgin Islands and not the Cayman Islands may well be the best choice. While many countries have increased services to meet the rising need for offshore funds and companies, the lawyers, fund administrators, and accountants in the better-known countries havealso increased their fees significantly in the past few years.

There is increased use of offshore companies and offshore banking services to protect against identity theft and the loss of wealth due to the global decline of the U.S. dollar. Many are surprised to learn how easy it is to operate offshore. Experienced investors are not as worried about where the fund is located as you may think. Funds tend to be formed in countries that are relatively interested in helping them set up (meaning that they have good laws and a good reputation as a country to associate with) and operate without a lot of initial and residual expense.

Always remember that the domicile of the fund need not be the same as that of its administrator and custodian. In our experience with fundorganizers, it is their inexperience with international business formations and bank regulatory matters that causes the most problems in terms of starting and launching the fund in a timely fashion. For all the rave about the Cayman Islands, it is important to keep in mind that it was a blacklisted country until 2001, about the time when it hired a lobbyist and a public relations firm in the United States to delete the American perception that it was a hotbed of money laundering. In recent years, Cayman representatives have "visited" the SEC, the Senate Banking Committee and the Vice President to promote the image that it is a law-abiding, well-run version of "Delaware."However, it is home some very recent and high profile fund disasters and the 700 or so Enron secret companies. In short, it hosts as much financial crime as the next country. Best Location for an Offshore Fund. The short answer is no one place is best. You can form an offshore fund in any location that make sense and is affordable. There are many areas of theworld that are considered prime offshore centers.

The most widely used (and most expensive) locations are Bermuda, the Cayman Islands, Guernsey, Hong Kong, the Isle of Man, Jersey, Luxembourg, the Mauritius, Singapore, and Dublin. These locations provide a welcoming climate for funds in terms of the ample (and pricey) supply of sophisticated lawyers, bankers, and consultants offering legal and accounting advice. To appease the United States and theOECD, many of these jurisdictions have enacted "heavy handed" regulatory schemes whichrenders the costs of establishing and maintaining a fund in these countries prohibitive to all but the very wealthy. Anguilla and the British Virgin Islands maintain a minimal regulatory scheme and the costs of establishing and maintaining a hedge fund in these countries are low.

These countries (and otheroffshore financial centers) are no different from Delaware in terms of what they offer a business. Why Setup Offshore? Many investment fund managers want to know when the time is right toset up a fund. It is best to ask and answer a series of questions: Where are your investors located and what matters to them? If you have a suitable investor base then the time is right to set up offshore. Consider setting up an offshore fund if you manage money for clients outside of your home country. It is that simple. Why would an invest or that does not live in your home countrywant to pay taxes there (or have to worry about paying taxes there)?For U.S. based fund managers, also consider setting up an offshore fund if your U.S. investors are tax-exempt person (for example, retirement accounts, pension funds, etc.). Under U.S. law, Tax-Exempt Persons (TEP) investing in a fund that borrows money to trade or generate investment income become taxable on such investment (or trading income) as Unrelated Business Taxable Income (UBTI), despite the TEP's otherwise tax-exempt status.

The exposure to UBTI can be managed in many cases by investing in certain types of offshore funds. Offshore Planning Trends in 2008. As a result of a "tweak" to its laws in November 2006, the Cayman Islands quietly become a much less attractive place to form a small offshore fund (meaning less than $10 million of seed capital). Anguilla (a country near the Cayman Islands)assumed that honor. However, in July 2007, the Cayman Islands again changed its law.

Despite the law change published in the Cayman Islands on August 6, 2007 as the Mutual Fund Law (2007 Revision), Anguilla (and the British Virgin Islands)remain one of the best places to start a private offshore fund. Anguilla. Anguilla enacted its current Mutual Funds Act in 2004. As a country, it offers a lowcost and efficient regulatory environment for private investment funds. The laws of Anguilla allow for three (3) types of investment funds, two (2) of which are important to fund managers starting a small offshore fund (in our experience). Those types of funds are the Private Fund and the Professional Fund. The laws of the Cayman Islands allow for four (4) types of investmentfunds, two (2) of which are important to fund managers starting a small offshore fund (in our experience). Those types of funds are the Category 4(3) Fund and the Category 4(4) Fund. Comparison of Mutual Fund Law in the Cayman Islands with that of Anguilla. Below is a modest comparison of the legal landscape of Anguilla with that of the Cayman Islands. Anguilla Private Fund versus Cayman Islands Category 4(4) FundMinimum Investment/Subscription.

 In Anguilla, there is no minimum subscription amount forinvesting into a Private Fund. The same is true of a Category 4(4) Fund in the Cayman Islands. However, in Anguilla, a Private Fund can have 99 investors while in the Cayman Islands, a Category 4(4) Fund is limited to 15 investors (all of whom can vote to remove you as operator of the fund). Audit Requirements. Neither country requires an audit nor the preparation of a prospectus;although most fund operators do so as a matter of practice. Number of Investors in Fund.

In Anguilla, a Private Fund can have up to ninety-nine (99)investors. In the Cayman Islands, a Category 4(4) Fund) is limited to fifteen (15) investors. In Anguilla, investors have no vote in the matters of a Private Fund. You can remain in control of the fund. In the Cayman Islands, you could lose control of a Category 4(4) Fund as investors have voting power sufficient to remove you as the fund's operator. Anguilla Professional Fund versus Cayman Island Category 4(3) FundMinimum Investment/Subscription. In Anguilla, a Professional Fund requires a minimum investment of USD $100,000 (or its equivalent in any other currency). The $100,000 limit doesnot apply to an investment made by the fund's manager, administrator, or promoter. In the Cayman Islands, a Category 4(3) Fund requires a minimum investment of USD $80,000 and this requirement applies to the fund's manager, administrator, or promoter.

 Prior to August 2007, a Category 4(3) Fund also required a minimum investment of USD $100,000. Audit Requirements. A Professional Fund in Anguilla is not required to submit audited financial statements annually to the government. A Category 4(3) Fund in the Cayman Island is required to file the fund's current prospectus with the government, pay a substantial annual registration fee and file a financial schedule. A Professional Fund in Anguilla is not required to issue a prospectus, albeit, most usually do as a matter of practice
Number of Investors in Fund.

Neither the Professional Fund nor the Category 4(3) Fund has any size restriction (but only a minimum subscription amount as stated above). In Anguilla, a Professional Fund is open to "professional" investors, generously defined in Anguilla as a person whose ordinary business involves dealing in investments or who has signed a declaration that he, whether individually or jointly with his spouse, has net worth in excess of USD $1,000,000 or itsequivalent. In Anguilla, a fund may be in the form of an Anguilla domestic company, international business company, limited liability company, limited partnership, partnership, unit trust or protected cell company, protected cell accounts, segregated portfolio company, or segregated portfolio accounts.

The corporate entities are extremely useful because they allow for the issuance ofseries or classes of shares with different rights thus allowing for the creation of umbrella funds and master/feeder structures. The use of an Anguilla domestic company also allows for the use of companies limited by guarantee and shares, as well as private companies. Always remember that the domicile of the fund need not be the same as that of its administrator and custodian. A fund's service providers can hail from the other side of the world. Moreover,the service providers' location usually is the more important issue. Why Setup a Fund? Market conditions have never been better for setting up a fund.

Investorsprefer to have money managed on a personal basis. Investors are trending away from Wall Street and heading toward "Main Street" when looking for help with their portfolios. It is no small secret that customized funds have taken up residence on Main Street and are attracting investors in droves. Traders that only dreamed of making a living by managing money for others are turning those dreams into reality for themselves.

TEB Offers ETF Derivatives Trading Services in Turkey
 
TEB Securities Services, formed by TEB A.S. and BNP Paribas Securities
Services (‘BNP Paribas') in 2007, is now able to offer clients a unique
integrated execution, clearing and reporting solution for exchange-traded
derivatives in Turkey,. This solution, which complements the TEB Securities
Services local clearing and custody offer, deliversing secure transactions
at lower costs and reduced operational risk, in Turkey.
This solution complements the fully-fledged local clearing and custody
offer provided by TEB Securities Services.

Through TEB Treasury's membership of TurkDEX, the Turkish derivatives
market, TEB Securities Services now offers a single entry point to Turkish
exchange-traded derivatives for execution and clearing of all instrument
types. This solution, which combines the expertise of BNP Paribas
Securities Services, the European's leading asset servicing provider, with
TEB's local market knowledge to offer clients provides  the following
services :

Front office side :
·     Execution with pro-active margin and funding solutions
·     Ttrade confirmation

Back office side :
·     Reconciliation of market executions
·     Margin Call payment and collateral management
·     Accounting and Control
·     Brokerage Fee calculation and reporting
·     Daily reporting of transactions, P&L, and Interest income on
collateral.

We TEB Securities Services isare the only custodian in Turkey providing
both execution and clearing packaged services within the one bank, thus
providing to our clients:
·     the benefits of working with an expert securities services provider
·     the support of the Bank's balance sheet support of the bank.

TurkDEX
TurkDEX is Turkey's first private exchange, founded in 2001, and in 2006 it
was the world's fastest growing market, with continued growth into 2007 and
2008:
·     The number of contracts traded increased from 6.6 million in 2006 to
24.9 million in 2007 an increase of 275%
·     The annual trading value rose from 17.4 billion in 2006 to 118
billion in 2007 an increase of 579%.
·     The monthly average open interest in 2007 increased by 107% in
comparison to 2006
*     source TurkDEx

About BNP Paribas
BNP Paribas (www.bnpparibas.com) is a European leader in global banking and
financial services and is one of the 4 strongest banks in the world
according to Standard & Poor's. The group is present in over 85 countries,
with more than 168,000 employees, including 129,500 in Europe. The group
holds key positions in three major segments: Corporate and Investment
Banking, Asset Management & Services and Retail Banking. Present throughout
Europe in all of its business lines, the bank's two domestic markets in
retail banking are France and Italy. BNP Paribas also has a significant
presence in the United States and strong positions in Asia and the emerging
markets.

GO Capital Asset Management announced its decision to freeze investor redemptions from its hedge fund, which invests in long/short global equities according to published reports. The fund has so far this year lost about 7.7% of its total assets. The decision by the fund’s managers took immediate effect; investors in the fund were informed that the management would not honor redemptions until Dec 1.

 GO Capital stated that such decision was made in the best interest of the fund’s investors, blaming the current illiquid market conditions as a factor in such decision. In a letter to the funds’ investors, GO Capital said, “The Fund Manager believes a temporary suspension of redemptions is the best defensive measure to protect the interests of the participants, in view of the current illiquid nature of some of the Fund’s investments”