Erik Serrano Berntsen & John Thompson 
A Guide to Starting Your Hedge Fund 

Successful hedge fund investing begins with well-informed
strategy

A Guide to Starting Your Hedge Fund is a practical,
definitive ‚how-to‘ guide, designed to help managers design and
launch their own funds, and to help investors select and diligence
new funds. The first book to examine the practical aspects of
setting up and operating funds with a focus on energy commodity
markets, this book scrutinises the due diligence process and
comprehensively reviews the opportunities and risks of all energy
commodity markets as hedge fund investments. Extensive planning and
strategy advice prove invaluable to prospective fund managers and
investors alike, and detailed discussion of the markets‘
constraints help inform procedural decisions. Readers gain insight
into practical matters including legal and commercial structures,
due diligence, fund raising, operations, and more, allowing them to
construct a concrete investment plan before ever touching a
penny.

Asset managers are looking to energy commodities to provide
attractive uncorrelated – if volatile – returns. These
high returns, however, are accompanied by high risk. Few investors
have experience evaluating these investment opportunities, and few
prospective fund managers understand the market fundamentals and
their associated risks. This book provides the answers sorely
lacking in hedge fund literature, giving investors and fund
managers the background they need to make smarter decisions.

* Understand the markets‘ structures, opportunities, and
risks

* Develop a comprehensive, well-informed investment strategy

* Conduct thorough due diligence with a detailed plan

* Examine the practical aspects of fund raising, legal and tax
structure, and more

Oil has long been traded by hedge funds, but electricity, the
fuels that generate electricity, and the environmental products
like emissions allowances and weather derivatives have become the
new ‚hot‘ investment strategies. These high returns come with
higher risk, but A Guide to Starting Your Hedge Fund ensures
participants have essential information at their disposal.

Inhaltsverzeichnis

Acknowledgements ix

Part I Why This Book? 1

Chapter 1 Introduction 3

Why This Book? 3

The Big Picture and Energy Commodities 4

Case Study: Amaranth Advisors 5

Layout 6

The Beginning 7

Bibliography 7

Part II the Basics 9

Chapter 2 What Is a Hedge Fund? 11

I Already Know What a Hedge Fund Is 11

A Little Bit of History 12

So What Is a Hedge Fund? 13

Hedge Funds (Un)Defined 16

The Growth of the Hedge Fund Industry 18

Hedge Fund + Commodities = Commodities Corporation 19

Whither Energy and Commodity Hedge Funds? 20

Moving Forward 20

Bibliography 21

Chapter 3 What Are Energy Commodities? 23

Introduction 23

What Are Energy Commodities? 23

The Regionality of Electricity 25

Why Are Energy Commodities Attractive for Investors? 27

A Complex, Solvable Problem 30

Drivers of Complexity 31

Conditions for Solvability 36

Principal Sources of Opportunity and Risk 39

Bibliography 46

Chapter 4 Trading and Investing in Energy Commodities 47

Bottom-up and Top-down 48

Trading + Managing a Business = Successful Hedge Fund 49

The Edge? 50

Trading Energy Commodities 52

Basic Financial Knowledge for Commodities 55

Conclusion 56

Bibliography 59

Part III Starting the Journey 61

Chapter 5 The Business Plan: Implications and Applications 63

Introduction 63

Objectives and Uses of a Hedge Fund Business Plan 64

Conclusion 71

Bibliography 72

Chapter 6 Laws, Contracts, and Lawyers 73

Don’t Kill Your Lawyer 73

Legal Basics for Funds 74

Master-Feeder Fund Structures 77

Side-Pocket Structures 81

The Firm 84

The Investment Advisory Agreement 86

Contents vii

Attributes and Variations of the Investment Management Enterprise 87

Structural Design Decisions 88

Case Study: Complex Tax Structuring 98

Be Nice To Your Lawyer 103

Bibliography 104

Chapter 7 Service Providers 105

Introduction 105

Long-Term Relationship: Service Providers and Marriage 106

Service Providers: Who and Where? 107

Negotiate, Negotiate, Negotiate 108

Service? 110

How to Choose? 112

Final Thoughts 113

Bibliography 113

Part IV Running the Business 115

Chapter 8 Fundraising 117

Strategic Investor Portfolio Design 118

Start-up Lifecycle Analysis and Investor Portfolio Development 127

Investor Acquisition – Marketing 130

Tools for Marketing and Key Marketing Documents 140

Marketing Documentation 143

Investor Maintenance – Investor Relations 152

Chapter 9 Operations and Infrastructure 155

Introduction 155

Infrastructure and Technology 158

Bibliography 160

Part V Final Thoughts 161

Chapter 10 Investing in Energy Commodity Hedge Funds 163

Asset Allocation: Portfolio Building Basics 163

Asset Allocation: Understanding Different Strategies 167

Checklist for Investing in Energy Commodity Hedge Funds 170

Bibliography 171

Chapter 11 Quo Vadis 173

Bibliography 179

Appendix A Sample Business Plan Outline 181

Appendix B Outline of a Confidential Explanatory Memorandum: Sample Offshore Feeder Ltd 183

Appendix C Sample Due Diligence Questionnaire Outline 189

Index 195

Über den Autor

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.