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Hedge Funds - Organizational Structure

The typical hedge fund structure is really a two-tiered organization.


Figure 1: Hedge Fund Organizational Structure




The general/limited
partnership model is the most common structure for the pool of investment funds that make up a hedge fund. In this structure, the general partner assumes responsibility for the operations of the fund, while limited partners can make investments into the partnership and are liable only for their paid-in amounts. As a rule, a general/limited partnership must have at least one GP and one LP, but can have multiple GPs and many LPs. There is an SEC rule, however, that generally limits investors to 99 in order to be excluded from SEC registration.

The second component of the two-tiered structure is the structure of the general partnership. The typical structure used for the general partner is a limited liability company. An LLC is very similar to a subchapter S corporation in that it is a flow-through tax entity and investors are limited in liability to the amount of their investment. The general partner's responsibility is to market and manage the fund and perform any functions necessary in the normal course of business, including hiring a fund manager (oftentimes a related company) and managing the administration of the fund's operations.



Fees


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RELATED TERMS
  1. Partnership

    A business organization in which two or more individuals manage ...
  2. Limited Partner

    A partner in a partnership whose liability is limited to the ...
  3. Organizational Structure

    Explicit and implicit institutional rules and policies designed ...
  4. Limited Partnership - LP

    Two or more partners united to conduct a business jointly, and ...
  5. General Partner

    Owners of a partnership who have unlimited liability. A general ...
  6. Subscription Agreement

    An application by an investor to join a limited partnership. ...
RELATED FAQS
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  2. What is the difference between a silent partner and a general partner?

    Understand the difference between a person designated as a silent partner and a general partner under the partnership business ... Read Answer >>
  3. Where does a hedge fund get its money?

    Learn how a hedge fund is structured and how the managing partner of the fund goes about the process of finding and soliciting ... Read Answer >>
  4. Can I buy insurance to reduce unlimited liability in a partnership?

    Find out why it is important to safeguard your general partnership in the even that one member becomes disabled, dismembered ... Read Answer >>
  5. What's the difference between general, limited and joined venture partnerships?

    Read about some of the important differences between general partnerships, limited partnerships and joint venture arrangements ... Read Answer >>
  6. What is the purpose of a hedge fund?

    Find out what a hedge fund is, how it is set up and why it is different than other forms of investment partnerships like ... Read Answer >>

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