Launching a crypto hedge fund in the United States is a complicated endeavor, especially given the rapidly evolving and dynamic crypto industry, and the area of the law associated with it. Take decentralized finance (DeFi), for example. Lawmakers and regulators continue to grapple with the legality of it all, yet some funds are willing to include DeFi as part of their investment strategy despite the uncertainty that comes with it. This is troubling not only from the legal perspective but also from the financial perspective.
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From deciding on investment strategy to determining the proper fund structure to choosing a fund administrator, the range of legal issues to take into consideration can seem quite daunting. Nevertheless, to those who are considering launching a U.S. crypto hedge fund: fear not! The Dilendorf Law Firm has compiled a list of matters every team should consider when embarking on this journey. While not exhaustive, the list illustrates the complexities associated with launching a crypto hedge fund in the U.S. and brings to light several issues many teams tend to overlook in the fast-paced environment that is crypto.
Every team, therefore, should gather and process the requisite information in preparation for lawyers, fund administrators, and auditors, and, most importantly, potential investors, before commencing with the creation of the fund. Matters to consider range from broad issues, such as investment strategy, to more minute details, such as the number of transactions the fund will make per any given month.
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To further illustrate, every team should first internally discuss and determine what its fund’s investment strategy will be. Going back to DeFi, will the fund be investing in the industry? That is, will the fund be involved in staking, lending, and borrowing on DeFi platforms? Or will the fund invest strictly in cryptocurrencies that are traded on centralized exchanges? What about investing in network tokens? A combination of the three? The answer to this question is important both because it impacts the risk associated with investing in the fund and because it relates to the question of whether the fund is investing in securities or not.
The questions do not stop there. Who will you choose as a fund administrator? Does the administrator have experience in the crypto field? Will the administrator be able to handle the number of transactions and capital accounts associated with the fund?
Moreover, who will be responsible for the costs and expenses associated with the fund? (i.e., management fees; general investment expenses; administrative, legal, accounting, auditing, record-keeping, tax form preparation, compliance, and consultation costs; governmental licensing, filing and exemption fees; etc.). One thing to note is that sponsors for hedge funds–that is, the person or entity responsible for financing the costs of setting up the fund–have the option to amortize the costs over a period of three to five years.
These questions only scratch the surface when it comes to setting up a crypto hedge fund in the US. While teams must address issues related to setting up a traditional hedge fund, they will also have to consider issues related to investing in the crypto field specifically which, as we know, is constantly evolving. All this is to say establishing a successful crypto hedge fund demands careful discussion, analysis, and decision-making from the founding team. It requires contemplation of scores of different matters which will have an impact not only on compliance with the law but also on operating a successful fund.
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