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Hedge Fund Business Models
Hedge Fund Business Models

Hedge Fund Business Models

CHAPTER
5
Hedge Fund Business Models
A
lthough a hedge fund is viewed by an investor as the portfolio of invest-
ments that provide a return, it may in fact be composed of two or more
separate businesses. The structure and division of labor of the businesses
are not arbitrary. The design of the hierarchy creates a limited liability in-
vestment for all investors and is tax efficient.
TYPES OF BUSINESS UNITS
To understand the typical hedge fund business structures, it is necessary to
first discuss the building blocks. Bear in mind that small variations exist
from state to state in the United States because the individual states autho-
rize the creation of business units. Fortunately, the rules are similar in most
states; these business structures have been adopted by all or nearly all the
50 states. The structures commonly used to create hedge funds are gener-
ally available in international locations, as well, although the makeup of
offshore hedge funds typically combines these business types differently.
C Corporation
The most familiar business structure to most people is the C corporation.
Most of the large companies in the United States and many of the small and
medium-sized companies are structured as C corporations. This type of
structure is also commonly used in many other countries.
The C corporation sells ownership stakes called common stock. A C
corporation can have practically an unlimited number of owners. These
owners can be spread over many classes of common stock plus preferred
stock.
The C corporation could be used to structure a hedge fund investment
so that investors could not be called upon to invest more than their original
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