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User:WWB Too/Hedge fund structure (The legal entity)

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Hedge fund legal structures vary depending on location and desired investor. Limited partnerships are principally used for US hedge funds, which are primarily aimed at US-based, taxable investors. Limited partnerships and other flow-through taxation structures assure that investors in hedge funds are not subject to both entity-level and personal-level taxation.[1] A hedge fund structured as a limited partnership must have a general partner. The general partner may be an individual or a corporation. The general partner serves as the manager of the limited partnership, and has unlimited liability.[2][3] The limited partners serve as the fund's investors, and have no responsibility for management or investment decisions. Their liability is limited to the amount of money they invest for partnership interests.[2][4] As an alternative to a limited partnership arrangement, U.S. domestic hedge funds may be structured as limited liability companies, with members acting as corporate shareholders and enjoying protection from individual liability.[5]

By contrast, offshore corporate funds are usually used for non-US investors, and when they are domiciled in an applicable offshore tax haven, no entity-level tax is imposed.[6][2] Many managers of offshore funds permit the participation of tax-exempt US investors, such as pensions funds, institutional endowments and charitable trusts.[2] As an alternative legal structure, offshore funds may be formed as an open-ended unit trust using an unincorporated mutual fund structure.[7] Japanese investors prefer to invest in unit trusts, such as those available in the Cayman Islands.[8]

The investment manager who organizes the hedge fund may retain an interest in the fund, either as the general partner of a limited partnership or as the holder of "founder shares" in a corporate fund.[9] For offshore funds structured as corporate entities, the fund may appoint a board of directors. The board's primary role is to provide a layer of oversight while representing the interests of the shareholders.[10] However, in practice board members may lack sufficient expertise to be effective in performing those duties. The board may include both affiliated directors who are employees of the fund and independent directors whose relationship to the fund is limited.[10]

Notes

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  1. ^ François-Serge Lhabitant (2007). "Handbook of Hedge Funds". John Wiley & Sons. p. 4.2. ISBN 0470026634.
  2. ^ a b c d Joseph G. Nicholas (2005). "Investing in Hedge Funds, Revised and Updated Edition". Bloomberg Press. pp. 40–41. ISBN 576601846. {{cite web}}: Check |isbn= value: length (help)
  3. ^ Mark J. P. Anson (2009). "CAIA Level I: An Introduction to Core Topics in Alternative Investments". Wiley. pp. 22–23. ISBN 0470447028.
  4. ^ François-Serge Lhabitant (2007). "Handbook of Hedge Funds". John Wiley & Sons. p. 4.1.1. ISBN 0470026634.
  5. ^ "Business Knowledge for IT in Hedge Funds". Essvale Corporation Limited. 2008. p. 124. ISBN 0955412455.
  6. ^ Guy Fraser-Sampson (2010). "Alternative Assets: Ivestments for a Post-Crisis World". Wiley. p. 112. ISBN 0470661372.
  7. ^ "Offshore Hedge Funds vs. Onshore Hedge Funds" (pdf). Fund Associates. 2008.
  8. ^ Daniel A. Strachman (2012). "The Fundamentals of Hedge Fund Management". Wiley. p. 3. ISBN 1118151399. If you are marketing to Japanese investors; you must have a Cayman-based unit trust. This group of investors rarely, if ever, invests in a hedge fund that is not set up as a unit trust.
  9. ^ François-Serge Lhabitant (2007). "Handbook of Hedge Funds". John Wiley & Sons. p. 4.2.1. ISBN 0470026634.
  10. ^ a b François-Serge Lhabitant (2007). "Handbook of Hedge Funds". John Wiley & Sons. p. 4.2.2. ISBN 0470026634.
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