Structure and participation of hedge funds, Financial Management

Structure and Participation of Hedge Funds:

The typical structure for a Hedge Fund is to facilitate the tax concerns of investors and fund managers. Basically, there are two or more pooling vehicles that serve the particular needs of the various types of investors. These are investment vehicles treated as a flow-through vehicle for taxable investors. They are typically Limited Partnerships (LPs) or Limited Liability Corporations (LLC), and allow the tax attributes of various investments to pass through directly to investors. The second pooled investment entity is typically a non-domicile or offshore corporation. This corporation is generally established in one of the tax haven jurisdictions, such as the Cayman Islands or Bermuda, especially for investment in US companies (or Mauritius for investment in India). This vehicle is structured in such fashion that it is to be treated as a corporation for tax purposes. Generally, in a corporation form of structure, investors are tax-exempt and non-resident investors, who are looking to have the tax characteristics of the underlying income, which would not pass through directly to them but be truncated.

There are other forms of business structure available that are not suitable for Hedge Funds; they are discussed as follows. The general partnership structure implies that each partner is jointly responsible for debts and losses that occur in a partnership; the personal assets of the partners are also attached. The domestic corporation form of structure results in double taxation. Therefore, generally limited partnership is a dominated structure in the domestic Hedge Funds and Corporation form for offshore Hedge Funds in tax-friendly countries in the Hedge Fund industry.

Posted Date: 9/11/2012 2:08:45 AM | Location : United States







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