Hedge Fund Business Models

Using Two (or More) Business Units to Alter Liability
If a corporation serves as the general partner of a limited partnership, the
general partner still has unlimited liability. However, the owners of the cor-
poration can't be required to put more money into that business. As a re-
sult, the ultimate owners of the partnership have liability limited to their
capital investment in the corporation.
Figure 5.7 shows the organizational structure of a limited partnership
that has a corporation as its only general partner. The structure may look
unnecessarily complicated. It is not necessary if the hedge fund is located in
a low-tax domicile. As you will see, structures similar to Figure 5.7 are typ-
ical in offshore funds. For a domestic fund organized in the United States
or any other country with a substantial corporate income tax, the structure
in Figure 5.7 avoids double taxation of investment returns at least for the
limited partners. If the general partner is organized as a limited liability
corporation or a subchapter S corporation, the general partner also avoids
double taxation of investment returns.
Simple Hedge Fund Structure
A simple hedge fund must have a business entity to hold the investments
plus at least one other business entity to act as manager. The manager usu-
ally contains all the employees involved with managing, marketing, and
operating the business. Figure 5.7 resembles a typical hedge fund organized
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HEDGE FUND COURSE
FIGURE 5.6
Limited Partnership Balance Sheet after Loss Exceeding Capital
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