Hedge Fund Business Models

in the 1990s or earlier in the United States. The corporation served as both
the manager and the general partner of the fund. Investors invested in the
fund as limited partners.
Several variations to the structure in Figure 5.7 have become com-
mon. First, fund managers may be organized separately from the business
that acts as the general partner because a manager may run more than
one fund. Each fund is backed by a different general partner, so that the
general partnership capital of other funds is protected from the failure of
another fund. Second, with the development of the limited liability struc-
ture, the fund may be structured without any general partners. Instead,
all the investors, including the insiders, invest as shareholders and have
limited liability.
Who Is Liable?
Hedge funds as a group are less risky than an unlevered investment in com-
mon stocks. Some funds do fail because of the risks they have taken, be-
cause of failure to effectively control risk, or because of fraud. If none of
the investors in a hedge fund have liability for losses beyond their commit-
ted investments, who bears the loss when hedge funds lose more than the
paid-in capital? Refer again to Figure 5.6. If general partners do not make
up losses, the decline in value falls on the liability holders.
Hedge Fund Business Models
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FIGURE 5.7
Basic Structure to Create Limited Liability
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