Hedge Fund Investments from Friends & Family

Seed capital providers may later require a separate fund

Any manager about to launch a hedge fund should be aware that accepting seed investments from friends and family members may disable you from qualifying your fund for the all-important 3(c)(7) exemption from mutual fund registration.

That exemption enables you to populate your fund with as many as 499 outside investors, but only if every one of those investors is a Qualified Purchaser. An individual is a Qualified Purchaser only if he or she has an investment portfolio (excluding his or her principal residence) of at least $5 million.

If any seed investor in your fund does not meet that test, you will have to either redeem that investor or go to the trouble and expense of creating two parallel funds — one for your F&F money and the second for your outside investors — and then allocate all of your investments pro rata between the two funds.