The new hedge fund, Stanphyl Capital Partners, LP., launched earlier this month out of NYC. Managing member Mark Spiegel reported the current AUM at $2M.

The Strategy
– Stanphyl runs a highly concentrated (three to ten “best ideas”) long-short equity strategy
– The long positions consist primarily– but not exclusively– of underfollowed microcap stocks
– The short positions consist of individual stocks and index and “macro” ETFs
– Investment decisions are fundamentally-based (both top-down and bottom-up), with technical analysis occasionally used to optimize entry and exit points
– There are over 8000 publicly-traded U.S. companies with market caps of under $500 million.
- The managing member believes that “outsized” gains can be made in these stocks due to the minimal attention paid to them by large institutional investors, while by using ETFs to establish well-timed index and “macro” positions, hedges (and often outright gains) can be created on the short side with minimal risk of being “squeezed”
– Using modest leverage, the strategy has generated a 26.7% gross annualized return since January 1, 2005 for the managing member’s personal portfolio

Spiegel is the managing member of Stanphyl Capital GP, LLC and is a NY-based equity investor. From late 2003 through early 2009 he was an investment banker (most recently as a Principal with Piper Jaffray & Co.) financing microcap public companies via private placement (“PIPE” and “Registered Direct”) transactions sized from $5 million to $100 million in companies with market caps of $50 million to $500 million. Prior to becoming an investment banker, Mark spent a year “inside” (i.e., working for) a microcap Nasdaq tech company.

Some Hedge Fund Highlights
• Volatility:  Due to their reduced liquidity, microcap stocks can be quite volatile on a short-term basis, and this volatility is often compounded by the portfolio’s “best ideas” concentration and typical hold period of six months to two years. Thus, on a monthly basis the NAV of the portfolio can move around quite a bit.
• Investor Concentration Limitations:  While Spiegel keeps the majority of his liquid net worth in Stanphyl, due to its high degree of concentration he limits each investor to placing no more than 10% of his or her liquid net worth in the fund.
• Occasional Very High Levels of Cash: Depending upon the availability of attractive investment opportunities (or lack thereof), there are times when Stanphyl may have much or all of its assets in cash. Spiegel is quite comfortable with the concept of “patiently waiting for the right pitch at which to take a swing.”

Based in New York, Dyment will be responsible for the management and development of UBS’s strategically important hedge fund franchise, with global functional responsibility for sales, capital introduction and business consultancy services to the hedge fund community within Global Prime Services and have responsibility for coordinating all hedge fund sales activities across the Investment Bank’s FICC and Equity Divisions.

“The hedge fund business presents a significant opportunity for our global investment banking franchise.” Yassine Bouhara, UBS Co-Head of Global Equities, said, “Dyment comes to UBS with deep knowledge and experience, and we are pleased that he will lead our hedge fund distribution business globally. We are equally pleased to demonstrate continued investment in our senior team in the Americas, which is of critical importance to our global business.”

Prior to the Shumway hedge fund, Dyment was Managing Director at Deutsche Bank, where he managed the Global Hedge Fund Capital Group. Prior to Deutsche Bank, Dyment worked for Goldman Sachs, building the firm’s capital introduction and consulting services businesses.

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Some comments in the Times include:

- “An unexpected source: a group of conservative financiers and wealthy donors to the Republican Party, most of whom are known for bankrolling right-leaning candidates and causes.” The Times reported.

- “I’m a pretty straight-down-the-line small-government guy,” Asness, a self-described libertarian, told the New York paper. “This is an issue of basic freedom,” he said.

- “We believe in social justice for all Americans,” said Cohen, who runs SAC Capital Advisers and is a frequent fundraiser for Republicans.

- “I think it is important in particular for Republicans to know this is a bipartisan issue,” said hedge fund manager Daniel Loeb, who has donated hundreds of thousands of dollars to the cause. “If they’re Republican, they will not be abandoned by the party for supporting this. On the contrary, I think they will find that there is a whole new world of people who will support them on an ongoing basis if they support this cause.”

- “The involvement of Mr. Singer is the most striking,” the Times reported, “given his devotion to conservative candidates and philanthropy: He is chairman of the Manhattan Institute, a right-leaning research group, and one of the most generous Republican donors in the country. But he also has a personal stake in the issue: he has a gay son who married his partner in Massachusetts, where same-sex marriage is legal.”

New York Mayor Michael Bloomberg, a billionaire businessman and philanthropist, is also planning a fundraiser for the cause at his Upper East Side town house and will be giving $100,000 of his own money, as well as lobbying lawmakers at the state capital and giving a speech on the issue.

The donations from the Republican donors total about two-thirds of the same-sex marriage coalition’s fund raising. On Sunday, supporters and opponents of same-sex marriage held competing rallies in Manhattan and the Bronx, the New American reported.

“The maturity and sophistication of the Brazilian hedge fund industry has been noted internationally, and what is clear is that there is not only an interest from the global industry – whether from managers, investors or service providers – in Brazil, but there is also an increasing desire from the Brazilian industry to engage and to think globally,” said Andrew Baker, AIMA’s CEO.

“As the global hedge fund industry association we believe we can offer access to the international hedge fund community to the Brazilian industry. We see our role as opening up an international channel of communication so that the Brazilian industry can engage in dialogue on key industry issues with their colleagues internationally, benefit from global best practice and receive comprehensive regulatory updates from the key jurisdictions worldwide.”

AIMA said that it would be working very closely with the Brazilian industry association, ANBIMA, and that it saw its role as a complementary one to the structures already in place for the Brazilian industry.

“Brazilian managers are becoming increasingly ambitious and looking beyond Brazil’s borders,” said Michelle Noyes, AIMA’s Brazil representative, “and there is understandable international interest in Brazil. We look forward to facilitating the dialogue between the Brazilian industry and the international hedge fund community.”

The increased gift tax exemption underscores a fundamental objective of estate planning for high net-worth individuals, which is to optimize the use of such individual’s gift tax exemption by focusing on assets that have the most potential post-transfer appreciation. A hedge fund’s interest, particularly a Manager’s Performance Allocation, is exactly that type of asset.

This article will review the basic hedge fund structure, describe the nature of a Manager’s interest in a hedge fund and identify the techniques available to a Manager to transfer his or her Performance Allocation in a tax-efficient manner.

Hedge Fund Primer

The individuals who founded and/or operate a hedge fund are commonly referred to as the “Managers” of the fund. More specifically, Managers are those individuals who ultimately own an interest in the general partner entity of the HF and thus possess the right to share in any Performance Allocation generated by the fund. A “Performance Allocation” (also known as an “Incentive Allocation” or “Carried Interest”) is typically equal to 20% of the aggregate net profits (determined after reduction for any Management Fees (described below) for the fiscal year) allocable to investors during such fiscal year. Generally, Performance Allocation will be realized only in the event net profits exceed an investor’s loss recovery account (commonly referred to as a “High Watermark”). An investor’s loss recovery account will be credited with aggregate net losses and debited with aggregate net profits (but not reduced below zero). The Performance Allocation applicable to such investor will not be allocated until the investor has recovered any net losses credited to his, her or its loss recovery account. Thus, to value a Performance Allocation, the appraiser must consider the uncertainty of fund performance, from an investment return perspective, the challenge of enticing investors to contribute capital, the need to maintain performance to retain such investors, and the inherent lack of marketability and lack of control associated with the interest itself. As a result, in comparison to the Performance Allocation transfer date value, the Performance Allocation may ultimately result in appreciation far in excess of such value, which makes it optimal for wealth transfer strategies.

Hedge Fund Structure Base

To adequately understand the nuances of implementing wealth transfer techniques with Performance Allocations, it is imperative that the client and his or her advisors understand the hedge fund structure. Typically, the hedge fund will include two separate feeder funds, each designed to accommodate specific classes of investors (for the purposes of this article, those feeder funds will be referred to as the “U.S. Fund” and the “Offshore Fund”). Unlike a private equity fund in which an investor makes a capital commitment that is called incrementally by the general partner over a prescribed time period (commonly referred to as the “investment period”), an investor in a HF contributes all of his, her or its capital upon subscription.

The U.S. Fund

The U.S. Fund is intended to invite investment from U.S. resident investors (other than U.S. based tax-exempt organizations). It is generally structured as a U.S. (commonly Delaware) limited partnership, which is a pass-through entity for U.S. income tax purposes; that is, there is no entity level tax and thus all tax attributes of the limited partnership flow through and are taxed to the partners. As a limited partnership, the U.S. Fund will consist of limited partners (those who generally have creditor liability only to the extent of their capital contribution) and at least one general partner (a partner who is subject to personal creditor liability for the actions of the fund). In the HF context, outside investors, such as institutions and wealthy individuals, will be the limited partners of the U.S. Fund.

The general partner interest of the U.S. Fund is commonly owned by a U.S. limited liability company (the “GP LLC”) in which the founders and other senior members of the fund are the managing members. Junior equity holders may be granted non-managing member interests in the GP LLC. Unlike a limited partnership, a limited liability company affords all of its members personal liability protection; therefore, the potential creditor issues associated with a general partner interest are contained within the GP LLC. Generally, it is a Manager’s ownership interest in the GP LLC that entitles him or her to a portion of the Performance Allocation, and thus that interest is the primary focus of most estate planning strategies.

The U.S. Fund will commonly invest substantially all of its assets in a Master Fund, as described below, although it may have the option to invest a portion of its assets directly. In exchange for its contribution of assets, the U.S. Fund will become a limited partner of the Master Fund.

The Offshore Fund

The Offshore Fund allows investment from foreign investors and U.S. tax-exempt organizations and is separate from the Onshore Fund for U.S. tax-efficiency reasons. The Offshore Fund is typically structured as a Cayman Limited Company, which issues shares to its investors. U.S. organized hedge funds generate ordinary taxable income (or short-term capital gains taxed at ordinary income rates) which can result in effectively connected income (ECI) of a trade or business. As such, foreign investors will be subject to U.S. income taxation on their HF earnings. Further, the income generated by such funds may generate unrelated business taxable income (UBTI) (e.g., debt-financed income) for otherwise U.S. tax-exempt organizations, which can result in such income being taxable to the U.S. tax-exempt organization at ordinary corporate income tax rates or, if the organization is not incorporated, at trust income tax rates. Accordingly, as a Cayman Limited Company considered a non-U.S. corporation for U.S. income taxes, foreign investors and tax-exempt organizations are not connected to a U.S. trade or business and thus are blocked from U.S. income taxation on their return of investment.

In addition, a foreign (non-resident alien) investor owning a direct investment in a U.S. company at the time of his or her death may subject such investor to U.S. estate tax. By including the Offshore Fund as a “blocker” entity in the structure, foreign investors will not be deemed to own an interest directly in a U.S. company for estate tax purposes.

As is the case with the U.S. Fund, it is very common for the Offshore Fund to be a limited partner of a Master Fund, as described below, and invest substantially all of its assets in such Master Fund, although it may have the option to invest a portion of its assets directly. In such case, the Performance Allocation associated with the Offshore Fund will inure entirely to the GP LLC via the Master Fund.

The Master Fund

A Master Fund is an entity included in the HF structure to coordinate the investments of the U.S. Fund and Offshore Fund (collectively the “Feeder Funds”). The Feeder Funds will usually employ parallel investment strategies. To avoid the negative U.S. tax consequences associated with passive foreign investment companies (PFICs), the Master Fund will be structured as a limited partnership for U.S. tax purposes and is often formed under Cayman Island law. The Feeder Funds contribute their assets to the Master Fund in exchange for Master Fund limited partner interests. The Master Fund will very often have the same general partner as the U.S. Fund (i.e., GP LLC). The Master Fund is commonly the entity that administers the bond trading and custody accounts. The appropriate Performance Allocation and Management Fee to be paid to the GP LLC and Management Company, respectively, may be determined at the Master Fund or Feeder Fund level.

The Management Company

It is also common for the HF to form an additional management company limited liability company (“Management LLC”) that provides investment advice and basic operational services to the fund, such as contracting for office space and coordinating payment of fund expenses (such as, operating expenses, employee salaries, bonuses, etc.). The Management LLC generally has no ownership interest in the fund, but is commonly owned by the same founders and senior individuals who own an interest in the GP LLC. In exchange for its services, the Management LLC enters into a management contract with the fund, which entitles it to receive a “Management Fee” equal to a specified percentage of the current net asset value of the underlying fund portfolio (generally ranging from 1.5% to 2%). Due to its relatively predictable value and potential assignment of income issues, estate planning transfers generally do not include a Manager’s interest in the Management LLC. Further, since the Management LLC typically only engages in a contractual arrangement to provide services to the funds, it does not possess any economic rights in the fund that would require it to be included in any Performance Allocation transfer, as required by the conventional Vertical Slice transfer technique described below.

To properly plan with hedge fund Performance Allocations, it is also important that a client’s advisors take into consideration certain features of a fund’s administrative policies and investment strategies. Certain aspects of a fund, such as Redemptions and Side Pocket Investments, may both affect the value ascribed to such fund interest as well as limit the usefulness of certain wealth transfer structures.

Redemptions/Withdrawals

The term “Redemption” or “Withdrawal” generally refers to an investor’s ability to withdraw all or a portion of his, her or its capital account in a Feeder Fund. The ability to withdraw is often limited by a Lock Up Period (e.g., 12 months following the initial contribution by the investor), during which time the investor will be either prohibited from withdrawing or penalized for making a withdrawal (e.g., 5% of the amount permitted to be withdrawn). Following the expiration of the Lock Up Period, investor withdrawals will be permitted on a regular basis provided, in many cases, that sufficient notice is received by the fund. In today’s more difficult capital raising environment and the need of investors to have transparency, the frequency in which investors may withdraw is commonly on a quarterly basis. Accordingly, the volatility associated with potentially a large investor capital withdrawal should be considered in forecasting and valuing Performance Allocations, particularly with unproven start-up funds.

Side Pocket Investments

Certain assets acquired by a HF may be or become illiquid, restricted or difficult to value (e.g., investments in financially distressed companies). Accordingly, it is common for a hedge fund to segregate such assets (commonly referred to as “Side Pocket Investments”) from its other assets and exclude such Side Pocket Investments from valuation, management fees, Performance Allocations and withdrawals by investors. Since the Side Pocket Investments represent an equity interest in the fund, the Manager should include a proportionate amount of such investments in any Vertical Slice transfer, as described below. Of course, due to the general illiquidity of Side Pocket Investments, an appraiser should view such investments similarly to a private equity fund investment and apply the appropriate valuation discounts. Further, it is important to note that due to the illiquid nature of Side Pocket Investments and the more challenging valuation methodology needed to ascertain the fair market value of such investments, Side Pocket Investments are generally not relied upon to service the obligations of certain wealth transfer strategies (e.g., GRAT annuity payments).

Conclusion

The use of Profits Allocation for lifetime gifting can produce extraordinarily successful results in shifting wealth to future generations. The availability of valuation discounts, resulting from the difficulty in raising capital and retaining investors when the potential for investor withdrawals is looming, make these assets prime for transfer. In order to engage in wealth-transfer techniques with Performance Allocations, the Manager and his or her advisors must have a significant understanding of the fund structure and tax issues associated with each transfer technique. In addition, it is important to consider whether the transferee individual or trust fully meets the Accredited Investor and Qualified Purchaser definitions, which is beyond the scope of this article.

Thanks to hedge fund specialist law firm Holland & Knight partner Bradley M. Van Buren.

In support of Hedge Funds Care, a global non-profit organization that works to prevent and treat child abuse, the gala will be held at the new JW Marriot in Chicago (151 West Adams St., Chicago, IL) from 5:30pm until 10:00pm CST.

In addition to this year’s reception, there will be a ceremony held at 7:00pm followed by a high profile live auction featuring items such as the privilege of throwing a ceremonial pitch at Wrigley Field along with 4 box seats to the game and a once-in-a-lifetime trip to Paris in a luxurious Gulfstream 450 and a private apartment in the 14th arrondissement.

Additionally, The Kelly Lively Memorial Award, given in recognition of outstanding commitment to Hedge Funds Care and the prevention of child abuse and neglect, will be presented to Mesirow Advanced Strategies, Inc. The Co-chairs for the event are Amy Rosenow, Chief Operating Officer of Sheffield Asset Management, LLCand Jennifer Edgcomb, Vice President GEM Realty Capital, Inc. Attendees will include hedge fund investors, service providers and senior professionals, including some of the most recognized and respected investment managers in the industry.

“Thanks to the plentiful help and support of the Midwest alternative investment industry, the Chicago benefit is in its 9th and what we hope to be its most successful year. We call on our colleagues in the financial services industry to help us set a new annual fundraising record as every little bit can make a difference in the lives of these children,” said Jennifer Edgcomb, Vice President GEM Realty Capital, Inc.

“Hedge Funds Care has been steadfast in pursuing our vital mission since the charity was founded: working to raise and invest funds for best-of-breed programs to prevent and treat child abuse and neglect.” stated Amy Rosenow, Chief Operating Officer of Sheffield Asset Management, LLC. “It is wonderful that the hedge fund industry can work together to show the world the power of targeted philanthropy in helping these children who are so much in need.”

Since its inaugural grant-making cycle in 2003, the Midwest Chapter has made 121 grants totaling in excess of $4,200,000. The ongoing commitment of hedge fund industry professionals and investors, Hedge Funds Care looks forward to continuing to support existing grantees while also expanding support to new programs.

The Midwest Committee of Hearts is co-chaired by Ron Suber, Senior Partner of Merlin Securities, and Benji Wolken, Partner at Ernst & Young LLP.

Each year, the organization honors a woman whose professional talent, business ethic, and passion for investing help define and advance the alternatives industry’s standards of excellence. Past awardees include Dorothy Collins Weaver, Collins Capital, Kathryn A. Hall, Hall Capital Partners; Sonia Gardner, Avenue Capital; Jane Mendillo, Harvard Management Company and Anne Dinning, D. E. Shaw group.

Ms. Beschloss is President and Chief Executive Officer of The Rock Creek Group, an industry-leading $7 billion global institutional alternative and emerging market investment firm. Prior to this, Ms. Beschloss was the Treasurer and Chief Investment Officer of the World Bank, responsible for managing $65 billion in assets and a $30 billion funding strategy, as well as $160 billion in derivatives and structured products. In this position, Ms. Beschloss was instrumental in developing a $3 billion portfolio of alternative investment funds. Her previous responsibilities at the World Bank include Senior Manager of the Derivatives and Structured Products Group and Fixed-Income Portfolio Manager. Ms. Beschloss previously worked for J.P. Morgan in New York and London, for Shell International Group Planning in London, and taught international trade at Oxford University.

Ms. Beschloss is a member of the Board of Trustees of the Ford Foundation, where she has chaired the Investment Committee. She is a member of the Board of Trustees of the Colonial Williamsburg Foundation and is on the Investment Committee of the Rockefeller Brothers Fund. Ms. Beschloss has also written a number of journal articles and books. She holds an MPhil (Honors) in Economics from Oxford University.

Proceeds from the New York Gala and other U.S. fundraising will support Clinton Global Initiative’s U.S. Childhood Obesity Prevention Program.

“We have systematically investigated the Russian nanotechnology scene”, said Marco Beckmann, CEO of Nanostart AG. “With growing interest, we became acquainted with the Perm region. That we are working exclusively with RUSANO and the governor of Perm, Oleg Chirkunov, is a tremendous testament to our work. But the most rewarding affirmation for us is the recognition that we have developed into a leading growth investor for nanotechnology.”

The purpose of the fund is to provide growth financing for young, promising nanotechnology companies in the administrative district Perm. Nanostart AG will invest up to 25 percent of the fund volume, 12.5 million euros, as well as manage the fund. RUSNANO and the governor of Perm are investing equal amounts for a total of 37.5 million euros, which rep-resents 75 percent of the fund volume. In addition to the shareholding, as fund manager Nanostart receives a carried interest of up to 25 percent as well as an annual management fee totaling 3 percent of fund volume.

RUSNANO is a joint-stock company with assets of more than $10 billion, making it the financially strongest nano-technology investor in the world. Nanostart has joined forces with the company for its market entry into Russia. The jointly launched Kama Fund First encompasses a volume of 2.0 billion rubles or nearly 50 million euros.

The Kama Fund First is named after the Kama River, which flows through the region.

The group of residents, farmers and representatives have been walking with signs and flags saying “Stop the Quarry,” since a rally at Queen’s Park in Toronto last Friday.

The project is backed by Boston-based hedge fund Baupost Group. If allowed to proceed it would be the second-largest US owned quarry.

The proposed site is located in prime farmland in Ontario’s potato-growing region known for a rare type of soil that is particularly suited to potato cultivation, the locals say.

“It will destroy productive farmland and threaten the headwaters of three important rivers – the Grand, the Nottawasaga and the Pine- water sources for one million people.” Carl Cosack, a local cattle and horse rancher, said.

“200 feet below the water table is deeper than Niagara Falls and will require the extraction of 600 million litres of water per day. They claim it will not have a negative impact, it’s simply not credible,” said Cosack.

The local farmers plan to finish the march with a rally on Tuesday afternoon at a potato farm next to the proposed quarry site on Highway 124.

“The (company) application runs more than 3,100 pages, and took five years and 20 consulting firms to create,” says area cattle rancher and horse trainer Carl Cosack, a rally participant. “The public was given 45 days to respond.”

Under Ontario law, an environmental assessment is not required for a mega-quarry.