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Hedge Fund Lending
Using hedge fund holdings to access the liquidity you need to
pursue your goals
For family offices and high net worth investors, hedge funds can represent a large
proportion of a well-diversified investment portfolio. Hedge funds are a useful
tool that can help protect wealth and offer long-term growth. Though hedge
funds may be attractive to certain investors, they may be less attractive as a
source of liquidity to cover short-term cash needs because of their potential for
restrictive redemption terms and, in some cases, higher volatility.
Investors may be able to harness their hedge fund positions as collateral for a
line of credit that is secured by the value of limited partnership interests. A line
of credit may offer you a way to access the value of these relatively illiquid
alternative investments. Called “hedge fund lending,” these credit facilities may
provide access to the cash needed to cover expenses without liquidating existing
positions, helping you stay on track towards your long-term goals.
CONSIDER THE WAYS HEDGE FUND LENDING MAY HELP YOU PURSUE
YOUR GOALS
Hedge fund lending may provide the liquidity you need to pursue your goals
while giving you the flexibility to maintain your desired investment strategy.
Hedge fund loan proceeds may be used for a variety of reasons, including:
• Making quarterly and annual tax payments
• Providing bridge-loan liquidity for personal expenses that occur before
receiving a bonus or payout
• Making other investments, including other hedge fund investments
• Utilizing relatively low cost financing to invest in potentially higher yield
investments
• Providing liquidity for capital calls
• Making large purchases, including homes, residential and commercial
investment, real estate, yachts or aircraft
• Bridging liquidity to take advantage of a new investment opportunity before
current investments can be redeemed
HEDGE FUND LENDING AND TAX
LAW CHANGES
2017 marks a period in which hedge fund
principals may be impacted by certain
changes to the Internal Revenue Code,
specifically, taxation of off-shore deferred
compensation. Historically, non-qualified
deferred compensation law offered limited
restraints regarding a hedge fund principal’s
ability to defer receipt of incentive or
management fees that were charged to
offshore funds. In essence, fees could grow
tax-deferred for up to 10 years. Changes in
tax law now require that any fees earned
and deferred before January 1, 2009, be
recognized for tax purposes by 2017.
For hedge fund principals with significant
off-shore positions, these changes may
trigger a significant tax bill.
To cover the taxes and avoid redeeming
a hedge fund position or liquidating
other investments, principals may want
to consider a hedge fund secured loan
as a source of liquidity that can help
them retain investments in their fund
and keep their financial strategy on track.
Hedge fund principals should consult their
tax advisor to evaluate all their options
before selecting the strategy to help cover
upcoming tax liabilities.
• Diversifying your overall portfolio by providing additional liquidity to fund the
purchase of non-correlated investments
U.S. Trust operates through Bank of America, N.A., and other subsidiaries of Bank of America Corporation. Bank of America, N.A. and U.S. Trust Company of Delaware (collectively the
“Bank”) do not serve in a fiduciary capacity with respect to all products or services. Fiduciary standards or fiduciary duties do not apply, for example, when the Bank is offering or providing
credit solutions, banking, custody or brokerage products/services or referrals to other affiliates of the Bank. Bank of America, N.A., Member FDIC.
Investment products:
Are Not FDIC Insured
Are Not Bank Guaranteed
May Lose Value
Before credit can be extended, this process generally requires
consent from the fund’s general partner, acknowledgment from
the hedge fund’s administrator and agreement to a number of
criteria, including:
HOW DOES HEDGE FUND LENDING WORK AT U.S. TRUST?
Hedge fund lending, offered through U.S. Trust, may allow you to
unlock the value of your investments by offering another avenue
to obtain a secured line of credit.
You may be able to obtain a hedge fund loan from U.S. Trust
if you are a limited partner or investor in a fund, or a family
office with a significant position in a fund or group of funds.
U.S. Trust looks for low levels of personal debt, sufficient liquidity
and sources of repayment beyond the hedge fund itself that can
cover the repayment of the line of credit and interest expense.
• Acknowledging U.S. Trust’s secured lien against the borrower’s
interest in the hedge fund and right of the Bank to redeem
upon default
The loans may be structured to serve short to medium term
liquidity needs, with terms of one to three years. The amount you
may borrow is generally dependent on the size of your hedge
fund position, frequency of redemption, the diversification of your
balance sheet, available personal liquidity, credit worthiness and
the nature of the hedge fund strategy itself.
• Providing ongoing reporting to the Bank regarding your interest
in the fund
• Acknowledging irrevocable instructions by the borrower to put
all redemptions and fund distributions in a pledge account for
repayment of your line of credit
• Providing annual audited financial statements of the fund or
funds that secure the line or credit
Prior to approving a hedge fund loan, U.S. Trust will undertake a
complete review of both the borrower and the hedge fund or funds.
T
HE U.S. TRUST HEDGE FUND REVIEW PROCESS
Before a hedge fund can be used as collateral, it must
undergo review by U.S. Trust’s lending team. The review
process focuses on several factors including but not limited
to: the fund’s financial standing and longevity; details of the
fund’s management and operations; investment strategy; and
offering terms.
•U
se of independent third-party administrators for
client reporting
• Judicious use of leverage and non-traditional instruments
• Incorporation in the United States or Cayman Islands
•R
egistration by the fund Investment Advisor with the SEC
(unless a family office vehicle)
In general, a hedge fund must meet several requirements to
be eligible for use as collateral in a loan. Below is a selection
of some of these requirements.
It is also important to note that these factors are generally
reviewed on a regular basis and changes in any of the key
indicators, such as a significant drop in net asset value, can
trigger a collateral call related to an existing line of credit.
Hedge fund loans are subject to additional review before an
advance is approved, primarily sufficient collateral value in
the hedge fund.
• A minimum net asset value in excess of $150 million
• Three years of satisfactory operating experience and
management with more than 10 years of experience
• Availability of unqualified audited financial statements from
a “Big 4” accounting firm
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MAKE SURE YOU UNDERSTAND ALL RISKS AND CONSIDERATIONS BEFORE BORROWING
Before taking out a hedge fund secured loan there are a number of key considerations that should be carefully reviewed and evaluated
to make sure that the strategy aligns with your overall financial picture, cash flows and risk tolerance. These considerations include:
Interest rate risk
Hedge fund loans are generally offered only with a variable interest rate. As rates increase, the cost of
servicing the debt will also rise. You should consider your outlook on rates and time horizon carefully
before borrowing.
Collateral calls
Hedge fund lending advance rates can vary significantly. The value of the underlying assets are evaluated
periodically and if the loan-to-value ratio drops below the pre-approved advance rates due to poor
fund performance or suspension of redemptions, you will be required to pay down the loan or provide
additional collateral. A collateral call may require you sell the hedge fund position or other investments at
a loss and may trigger a taxable event.
Repayment
requirements
Hedge fund lending includes specific repayment terms and loan lengths of generally less than three
years. Before borrowing, you should understand your cash flows and ability to pay as the terms of a
hedge fund loan may allow the lender to reduce your advance and maintenance values, including to 0%,
and even obtain repayment directly from the hedge fund itself through a forced redemption upon default.
Legal fees
In addition to interest and other fees, due to their customized nature, hedge fund loans also usually
involve third-party legal fees associated with reviewing hedge fund documentation and establishing the
line of credit. In general, it is the borrower who must cover these costs.
Regulatory
restrictions
The purpose of the hedge fund loan proceeds must be understood in advance of borrowing to ensure
that you abide by regulatory restrictions if you are using the funds to purchase investments, including
many U.S. listed securities or other hedge fund interests. Your loan will need to be structured to comply
with applicable regulations.
Public disclosure
Lines of credit against hedge fund interests require a UCC-1 filing that gives publicly available notice of
the lender’s secured interest in the hedge fund. If the hedge fund is held in an LLC or other entity, the
entity will be listed in the filing.
As with all lines of credit, borrowers should consult with their own tax advisors and legal counsel before putting a credit facility in place.
U.S. TRUST HAS SPECIALIZED EXPERTISE IN HEDGE FUND LENDING
You and your private client advisor can access the experience of a credit specialist at U.S. Trust. They will take a consultative
approach to help you and your advisor understand the role hedge fund lending can play as part of a larger financial plan. They are
committed to developing a credit structure that meets your needs, with customized, flexible loan terms. They will also discuss the
risks associated with hedge fund lending.
Credit specialists are focused on hedge fund loans structured as personal loans made to an individual, trust, or family wealth
vehicle with a personal guarantee by an individual. This type of financing is not available to the fund or fund-affiliated entity.
Loans to the hedge fund itself may be accommodated by other areas of U.S. Trust.
Hedge fund lending should be carefully evaluated and tailored to your cash flows, asset allocation and personal and business goals.
These loans should only be used to provide liquidity in a way that complements the other aspects of your financial strategy.
Consider how hedge fund lending may help you pursue your goals
To learn more about how our credit team can help you access the liquidity you need and harness the power of your hedge fund
holdings, talk to your advisor.
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H E D G E F U N D L EN D IN G
ustrust.com
Please note that nonfinancial assets are not suitable for all investors. Nonfinancial assets, such as real estate, are complex in nature and involve risks including total
loss of value. Special risk considerations include natural events (for example, earthquakes or fires), complex tax considerations and lack of liquidity.
This material is designed to provide general information about ideas and strategies. It is for discussion purposes only, since the availability and effectiveness of any strategy are
dependent upon your individual facts and circumstances. Always consult with your independent attorney, tax advisor, and investment manager for final recommendations and
before changing or implementing any financial, tax, or estate planning strategy.
Hedge funds affiliated with Bank of America Corporation may not be available as collateral.
Credit facilities may be provided by Bank of America, N.A., Member FDIC, or other subsidiaries of Bank of America Corporation, each an Equal Opportunity Lender. All credit and
collateral are subject to credit approval and may require the filing of financing statements or other lien notices in public records. Asset-based and securities-based financing
involves special risks and is not for everyone. When considering an asset-based and/or securities-based loan, consideration should be given to individual requirements, asset
portfolio composition and risk tolerance as well as capital gains, portfolio performance expectations and investment time horizon. For any loan with securities collateral, the
securities or other assets in any collateral account may be sold to meet a collateral call as provided in the definitive loan documents and the client is not entitled to choose
which securities or other assets will be sold. A complete description of the loan terms will be found in the individual credit facility documentation and agreements. Clients
should consult with their own independent tax and legal advisors.
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