Hedge Fund Investing: A Practical Approach to Understanding Investor Motivation, Manager Profits, and Fund Performance

Hedge Fund Characteristics and Structures

Legal Entities and Domiciles

A hedge fund is a specific type of alternative investment. It is a commingled vehicle that allows many investors who qualify to be aggregated and invested in a single pool of capital. A hedge fund is generally lightly regulated and uses leverage and short selling, in addition to traditional security selection and asset allocation, to generate returns and also often uses derivatives to enhance its results.

Hedge funds are generally organized as either onshore funds or offshore funds. Onshore funds are funds organized in the United States as either partnerships or limited liability companies. Offshore funds are investment companies organized outside the United States, typically in a tax haven such as the Cayman Islands or Luxembourg.

Onshore funds are U.S. entities that are formed as limited partnerships (LP) or limited liability companies (LLC). The LP form is much more widely used in practice. Onshore funds are typically formed in Delaware and managed by a general partner (GP). The managing member or manager typically manages an LLC. Investors in an LP are limited partners, and investors in an LLC are simply members.

Offshore funds are most typically organized in tax-exempt jurisdictions and offered to U.S. non-taxable investors or investors located outside the United States. The vehicle is usually a form of a segregated portfolio company (SPC) or LP that elects to be treated as a corporation for U.S. tax purposes, ...