Hedge Fund Formation

SGA specializes in Hedge Fund Formation of both Domestic and Offshore funds and can move quickly to get you started. From forming the underlying company to helping you to articulate the investment strategy of your fund we offer timely expertise.

Whether Domestic or Offshore we will help you to decide which structure and jurisdiction is best for you and your investors. From Parallel Funds to the Master Feeder Structure we will find the location that has the best tax benefit for both you and your clients.

Legal Structure of Fund
The legal structure of a hedge fund largely depends who its investors will be. For example, a private investment vehicle formed for the benefit of persons who reside outside of the United States will be organized differently than an investment vehicle formed for the benefit of United States residents.   We can assist you in choosing the best hedge fund formation structure for you and for your investors in a jurisdiction that will offer a beneficial taxation structure.

A Domestic Hedge Fund Structure generally has a Limited Liability Company as the management company and a Limited Partnership as the Investment Fund.  The Limited Liability Company is the General Partner and the Investors are Limited Partners of the fund. 

In the domestic fund structure the Limited Liability Company's operating agreement dictates the powers and responsibilities of the General Partner of the fund.  Generally the operating agreement includes among other things a description of the of the purpose of the company which is to manage the affairs of the Fund.  There should be a detailed indemnification clause, which grants the General Manager of the Fund the ability to make decisions regarding the Fund without fear of misguided retribution when the market takes a downturn.  There must be a portion that details how the General Partner will manage records, where the funds will held and who will do the accounting for the fund.   Then, of course, there is the section on taxes; this will change depending on what type of fund it is addressing.

The Limited Partnership Agreement dictates the powers and responsibilities of the investors in the Fund.  Generally the Limited Partnership Agreement includes an "Objects and Purposes" section which details the purpose and trading strategy of the fund.  This area will be read by your prospective clients, so be careful with the wording you choose, this is in effect your sales pitch, and informs the client of how you intend to manage the fund.  There should be a section that notifies the Limited Partner that the General Partner shall have the power, acting on behalf of the Partnership, to carry out any and all of the objects and purposes of the Partnership. The Limited Partnership will bear all costs associated with the organization of the fund and shall reimburse the General Partner for (i) accounting fees, including tax return preparation costs, relating to the Partnership's independent accountants; (ii) legal fees and expenses, including, but not limited to, fees and expenses incurred in connection with the Partnership Agreement, any offering of Limited Partner Interests, Partnership contracts and investments and any defense of the Partnership in any action or proceeding; (iii) insurance and bonding costs; (iv) all trading expenses and transaction costs, including brokerage commissions and expenses relating to short sales, clearing and settlement charges, interest on loans and debit balances, margin interest, broker service fees and other clearing and custodial expenses.  Again there should be an additional detailed indemnification clause.  As this is a Hedge Fund there must be a detailed section on Partner Contributions, what is the minimum contribution, how long will those funds be held, and what is the process to withdrawal those funds once the lock up period has expired.

The Limited Partner and investor in the Fund must also complete a subscription agreement, which requires information about the investor's assets.

A Master-Feeder fund structure is commonly used to accumulate funds raised from both U.S. taxable, U.S. tax-exempt and non-U.S. investors into one central vehicle - the master fund - in order to enhance the critical mass of tradable assets, improve the economies of scale under which the fund arrangements operate and enhance operational efficiencies, thereby reducing costs.

The structure generally involves the use of a master fund company (incorporated in a tax-neutral offshore jurisdiction such as Anguilla, the Cayman Islands or Bermuda) into which separate and distinct "hub" or feeder funds invest. U.S. taxable investors take advantage of investing in a U.S. limited partnership feeder fund, which through certain elections made at the time the structure is established, is tax effective for such U.S. taxable investors. Non-U.S. and U.S. tax-exempt investors subscribe via a separate offshore feeder company so as to avoid coming directly within the U.S. tax regulatory net applicable to U.S. taxable investors.

In this way, the tax impact of an investment in the fund for U.S. taxable investors and non-U.S. or U.S. tax-exempt investors, respectively, is minimized without the presence of one class of investor prejudicing the tax status of other classes of investor in the fund.

In a Side-by-Side structure, U.S. investors typically invest in a limited partnership organized in the United States and offshore investors invest in an offshore corporation. The prime broker typically allocates trade tickets between the domestic fund and the offshore fund.

For hedge fund managers seeking to establish both a domestic and an offshore fund, there are various tax, administrative and other issues the manager should consider in determining whether to utilize a master feeder or a side-by-side structure.

We look forward to assisting you in finding the most appropriate Hedge Fund Formation structure for your investors.