Master-Feeder Structure: This is a common structure, which allows both US and offshore investors to directly invest in the same “master” offshore fund through separate domestic-based and offshore-based “feeder” entities. This structure is often useful for certain strategies, such as a fund of funds strategy, but less advantageous for trading intensive strategies because of the administrative burden of splitting trade tickets between both funds. Side by Side Structure: In this type of structure, a US based manager will run two completely separate funds, one domestic and the other offshore, in an identical manner. The sponsor and management company can be either US based or offshore based, but most offshore stand-alone fund structures are managed by an offshore entity. Single Fund Structure: This structure is primarily geared towards non-US investors, and also potentially to US based non-taxable investors (such as pension and endowments). There are three primary structures used for establishing offshore funds: In both the Caymans and BVI, there are strong regulatory structures in place in order to assure investors that the funds in which they invest are legitimate. The Cayman Islands and the British Virgin Islands are the two most frequently used jurisdictions for offshore funds, with Bermuda, Ireland and the Netherlands Antilles less frequently utilized. The vast majority of offshore funds are established in low or zero tax jurisdictions so that there is little or no corporate level tax for the fund (although the offshore investor will still be liable for taxes on gains and income from the fund in their country of residence). If a US domiciled manager intends to allow non-US citizens or US tax-exempt investors to invest in its fund, an offshore vehicle is established. The limited partnership agreement provides wide latitude in defining all relevant control, operation and fee structures of the fund. An operating agreement is prepared for the LLC and a limited partnership agreement for the investment vehicle. Generally, the general partner or LLC is organized in the state of the investment manager’s domicile, while the LP or Fund is often organized as a Delaware entity because of the state’s well-developed and business friendly laws. This provides the advantage of limited liability for the investors and its managers (through the LLC), along with the benefit of “pass-through taxation” (all income is passed through to the partners and members) inherent in the structure of a partnership, thereby avoiding the double-taxation characteristic of the corporate structure. Typically the hedge fund is set up as a General Partnership, with a limited liability company acting as the funds General Partner. taxable investors, a hedge fund can be constructed as a single U.S. The structure and domicile of a hedge fund is primarily dependent on two variables: (i) the tax status and residency of its prospective investors and (ii) the investment strategy employed by the manager. The following is an outline of legal, structural and practical considerations to be evaluated in establishing your hedge fund. Creating a legal and structural framework at the outset that is in tune with the fund’s investment objectives and investor base is the foundation for a successful fund. Brokerage, legal, tax and technological considerations are essential to the development of a successful fund. Launching a hedge fund is a major undertaking that requires a systematic approach and experienced partners in a variety of industries and areas of expertise. Now it’s time to evaluate the options available to you in structuring your fund, navigating the regulatory landscape and choosing the right partners to ensure that your fund and management company has the proper foundation in place for growth. FACTA Frequently Asked Questions – The BasicsĪfter years of hard work, you finally have the strategy, experience and resources to establish and manage a hedge fund.Adoption of NASAA’s Model “Private Fund Manager”Įxemption to State Investment Adviser Registration.Launching A Hedge Fund? Is Investment Adviser Registration Required?.Commodity Pool Operator Registration for Hedge Fund Managers: Frequently Asked Questions.White Paper: FACTA Frequently Asked Questions – The Basics. Overview of Investment Funds in the British Virgin Islands.
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