Hedge Fund Overview

The term "Hedge Fund" carries no formal definition in securities law, and the private investment vehicles that make up this "industry" are extremely diverse. Broadly defined, a Hedge Fund is an investment structure utilized by a professional money manager or group of managers that permits the management of a private, unregistered investment pool of capital and/or securities. A Hedge Fund is a very specialized, open-end investment company or private investment fund that permits the manager to use a variety of investment techniques normally prohibited in other types of funds. These techniques include borrowing money, selling short, and utilizing options, to name a few. In short, hedge funds are private investment funds (similar to mutual funds), which offer investors the possibility of extraordinary gains with above-average risk. When providing these "gains," the Hedge Fund structure allows the fund manager to charge an incentive-based, performance fee which is based upon a percentage of profits that the fund returns to investors. The reliance on exemptions from securities registration (state and/or federal laws) limits the number of participants who must also satisfy accredited investor or institutional investor definitions. Hedge Funds are considered alternative investments since they employ an investment strategy that differs from conventional (long position) money management.

Historically, Hedge Funds for U.S. investors have been formed as limited partnerships, and our materials - unless otherwise noted - assumes that the hedge fund vehicle you choose will be a limited partnership. However, now that most states have passed legislation approving the limited liability company (LLC) as an entity that provides liability protection to investors, funds may be organized as limited liability companies assuming they can be structured in a manner to provide income tax treatment that is similar to that afforded investors in limited partnerships. The relative benefits and disadvantages of the two forms of organization are beyond the scope of these materials, and for simplicity, we discuss all hedge fund issues in terms of funds organized as limited partnerships.