Hedge Fund Structure

Limited Partnerships mostly used for creating hedge fund legal entity (wiki hedge fund). And any one of LLC, C or LLP can be chosen for company managing hedge fund. Best combination is LP for hedge fund and LLC for managing company. This way all the profits can be passed directly to members avoiding double taxation. Special case, LLC is chosen for offshore funds and LP for domestic funds. Below are details on how best structure can be formed for for domestic funds.

1) Open a single or multi member LLC. This will be legal entity for managing company. This company will provide advising or services to hedge fund LP and will charge for its services. Some states require it to register as advisors with state and beyond 250 million its required to be registered with SEC.
2)Open bank account for this managing LLC.
3)Create Hedge Fund LP (limited partnership) legal entity. All the outside investors will be limited partner of this fund and managing company will be general partner.
4) Opening bank account for this hedge fund LP is optional. Its better to have separate bank account for both entities.
5) Open two brokerage accounts on hedge funds name. One for long term investments and other for short term or speculation. Very useful to keep both separate from tax as well as clarity of purpose perspectives. Benjamin Graham recommends this approach. Other option can be using LIFO approach for accounting. But I dont think LIFO approach provides all benefits of maintaining two separate bank accounts.

During operation, limited members will send money to hedge fund account. Managing company will invest this money into brokerage account. It can also withdraw its managing service charges from hedge fund account. Managing company will have its separate account for day to day or other expenses. This approach would be very easy to calculate NAV valuations for hedge fund and profitability for managing company.


Below are links which give differences between LLC and LLP.
1)From Diffen.com
2)Some university website

Rational behind choosing LLC over LLP for managing company.
1) LLC has more like corporate structure..can be very easily extended to unlimited number of shareholders.
2) Partnerships requires clear definition of limited and general partners. General partners are executive who bear responsibility for losses and debts of firm whereas in llc stakeholders are shielded from liabilities.
3) Single Taxation. No major difference from tax benefit point of view...some minor varifications from state to state.
4) In LLC, excecutive need not to be stakeholders
5) LLC can be opened using 1 to any number of holders whereas partnerships need tleast two.
6) Usually partnerships are chosen for professional business like lawyers, accountants or auditors...LLC ideal for any small business.

In Summary - LLC is ideal for incubant hedge fund and for further expansion too.