Hedge Fund Formation

As a result of state and federal regulatory issues, hedge fund formation has become more complex over the years. Going back just 10 years, most of the investing public knew very little about hedge funds. Now, with the internet, as well as heightened interest on the subject, anyone can find large amounts of information on these once secretive investment vehicles.

It is not uncommon for newspapers, even small local papers, to carry at least one article that mentions something about a hedge fund. Large amounts of capital fund these investment vehicles. Investors include wealthy individuals, trusts, institutions and pensions. It is estimated that over one trillion dollars is now managed by hedge funds, and the number keeps growing.

Hedge funds can be broken down into two categories: (1) domestic and (2) offshore.

DOMESTIC
Domestic hedge fund formation is almost always in the form of a limited partnership. The investors purchase limited partnership interests rather than shares of stock. By purchasing limited partnership interests the investors are protected from loss in the event of a lawsuit against the hedge fund, however, they are only limited to loss of their limited partnership interest. There is also a benefit in taxation when an investor is a limited partner. In the United States, investors face double taxation if the fund is set up as a corporate entity, since there would be tax at the corporate level and tax at the individual level.

OFFSHORE
Offshore hedge fund formation is almost always in the form of a corporate entity. The choice of jurisdiction is important since the fund manager will want to choose a tax free jurisdiction so the investors will benefit from such a structure, however, they may not be U.S. persons since that would defeat the purpose of the tax free jurisdiction. The Cayman Islands and the Netherlands Antilles seem to be two of the more popular choices for offshore formation.

Contact me if you are considering setting up a hedge fund. There are many issues you may not have considered. I have set up domestic and offshore hedge funds for clients over the years and advised them on many regulatory, structuring and procedural matters. Joseph B. LaRocco, Esq.

Here’s some more information on Hedge Fund Start Up

For some more background information that might be helpful check out Hedge Fund Formation - How to Define a Hedge Fund.