Most hedge funds raise money through a private offering exemption under Regulation D of the Securities Act of 1933. Although Reg. D prohibits general advertising, fund managers do distribute certain documents to prospective investors. These documents are designed to give an investor a complete picture of the fund’s investment strategy as well as the risks of investing in the fund.

Having improper or incomplete documentation can subject a fund manager to the risk of regulatory intervention and civil liability, both of which may carry significant costs. Generally, a start up hedge fund requires a private placement memorandum, a limited partnership agreement or operating agreement, and subscription documents. If the hedge fund has multiple managing principals, these principals should generally have a management agreement or other operating agreement between themselves to define rights and responsibilities. Hedge funds that utilize third-party placement agents to solicit investors will also need additional documentation.

Finally, hedge funds often develop collateral marketing material, including a “pitch book” and a “tear sheet” to provide an overview of the fund for prospective investors. All of the legal documents necessary to start a hedge fund should be drafted or reviewed by a licensed attorney with experience in the investment management industry.