Hedge funds typically operate as limited partnerships between investors and fund managers. The fund manager determines investment strategies and makes decisions while also investing personal capital. Investors include accredited individuals and institutions. Hedge funds employ service providers like prime brokers, auditors, and lawyers. Fees include annual management fees of 1-2% of assets as well as performance fees if the fund exceeds a high-water mark.

1. HOW HEDGE FUNDS ARE STRUCTURED

2. How Hedge Funds Are Structured
Contents
Table of Contents:
Executive Summary
Hedge Funds’ Unique Structure 3
A hedge fund is an investment vehicle that Typical U.S. Hedge Fund Structure 4
can employ a wide range of investment
Most Hedge Funds Are Established As 5
and trading activities to maximize Limited Partnerships
performance returns while minimizing
Investors 6
investment risk.
Portfolio Managers 7
Most hedge funds are established as General Counsel, Auditors & Administrators 8
limited partnerships between the fund
Prime Broker 9
manager and investors. While the specific
structure can vary from fund to fund, there Executing Broker 10
are a few characteristics that are Organizational Structure 11
applicable across the industry.
General/Limited Partnership Model 12
This presentation provides a brief Fee Structure 13
overview of some of the structures of
Term Structure 14
hedge funds in the marketplace today.
Graphic Illustrating Typical Fee Structure 15
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3. How Hedge Funds Are Structured
Hedge Funds’ Unique Structure
Unique to the investment community, hedge funds
are a partnership formed between the fund
manager and the investors.
Typically hedge fund managers invest a
significant amount of personal capital - in some
cases in excess of 50 percent of the total assets
in the fund - aligning their interests with that of
their investors.
Source: Nocera, Joe (16 May 2009). "Hedge Fund Manager's Farewell". The New York Times. Retrieved 16 March 2011. 3

4. How Hedge Funds Are Structured
Most Hedge Funds Are Established As Limited Partnerships.
Investors share in the partnership’s income, expenses, gains and losses; each partner is taxed
on its respective share of the partnership.
Key Players: Determines strategy and makes investing decisions and allocations. The
portfolios manager is also in the fund and is compensated via a modest
Portfolio management fee, as well as a performance fee based on the fund’s annual
Manager(s) performance. Fund managers only get a performance fee if the fund makes
money.
Funds must secure their loans with collateral to gain margin and secure
Prime
trades. In turn, each broker (usually a large securities firm) uses its own risk
Broker matrix to determine how much to lend to each of its clients, acting as a de
facto regulator.
Ensure fund compliance; verify financial statements
Auditors
as required by federal law.
*Note all hedge funds and managed futures firms are required by law to be registered with the SEC/CFTC or local and state regulators if they make over 4
$100 million.

5. How Hedge Funds Are Structured
Typical U.S. Hedge Fund Structure
Here is an example of the structure Auditors and
of a typical U.S. hedge fund: Administrators
Portfolio Manager
Investors
Investors Prime Broker
Hedge Fund
Investors Executing Broker
Investors
Legal Advisors,
Registrar and
Transfer Agent
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Source: “Hedge Funds and Other Private Funds: Regulation and Compliance” Thomson West, 2010

6. How Hedge Funds Are Structured
Investors
Because hedge funds are highly regulated, by the SEC and CFTC in the U.S., fund managers can only
accept investment capital from accredited investors or qualified purchasers, including:
1. Public employee retirement plans
2. Corporate employee retirement plans
3. University endowments
4. Foundations and non-profit organizations
5. Family offices and high-net-worth individuals. Regulatory qualifications for high-net-worth individuals
are outlined below.
High Net Worth Individual:
An individual whose net worth, or joint net worth with the person’s spouse, exceeds $1 million at the time of
the purchase, excluding the value of their primary residence
Individuals with a yearly income of $200,000 or higher in each of the two most recent years or joint income
with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level
in the current year.
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Source: SEC, “Defining the Term "Qualified Purchaser" under the Securities Act of 1933.”

7. How Hedge Funds Are Structured
Portfolio Managers
What is the role of a Portfolio Manger?
• The portfolio manager makes daily investment decisions for the fund,
choosing where and when to allocate investment capital.
• Portfolio managers may be either direct employees of the hedge fund
management firm or employees of another firm hired by the hedge fund
management firm to provide investment advice pursuant to a sub-
advisory agreement.
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8. How Hedge Funds Are Structured
General Counsel, Auditors, and Administrators
What is the role of a General Counsel?
The role of the General Counsel has evolved
greatly in this new era of Dodd-Frank and increased
regulation by the SEC. In addition to providing legal
support and guidance, General Counsels now play
a significant part in successfully managing a fund’s
operations, returns, fundraising, and reputation.
What are Auditors and Administrators?
The offshore fund entity that manages the back office
work and individual accounts for the fund.
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9. How Hedge Funds Are Structured
Prime Broker
A brokerage firm provides multiple services to a hedge fund that are beyond
the scope of those offered by a traditional broker, such as:
• Clearing and Settlement of Securities Transactions
• Financing
• Recordkeeping
• Custodial Services (oversight of subscription and redemption order processing)
• Research Capabilities
Below are examples of Prime Brokers:
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10. How Hedge Funds Are Structured
Executing Broker
An executing broker is a type of financial dealer
or broker that is accountable and responsible for the
completion and processing of an order that is
requested by a client.
As part of the process, brokers of this type will evaluate
the order to make sure it is in line with all current
policies and procedures and in compliance with any
regulations set by the market.
Below are examples of Executing Brokers:
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11. How Hedge Funds Are Structured
Organizational Structure
The range of investment strategies
available to hedge funds and the types of John Smith
positions they can take are quite broad General Partner
and in many cases, very complex.
The typical hedge fund structure is really
a two-tiered organization.
The general/limited partnership model is
the most common structure for the pool
of investment funds that make up a State Retirement Plan/
hedge fund. University/ High Net Hedge Fund X
Worth Individual
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12. How Hedge Funds Are Structured
Off-Shore Organizational Structure
General Partner of
In structuring a hedge fund, a principal concern General Partner Investment Manager
LLC LLC
is to provide the most favorable tax result for
the investors and the fund manager itself.
Taxable
Fund managers will seek to utilize entities U.S. Investment
Investors Manager LP
domiciled in jurisdictions which have clear and
predictable laws, quality service providers, and Domestic
are familiar to investors. It is for these reasons Hedge Fund LP
that off-shore hedge funds are often Offshore Non-U.S. &
Hedge Fund Tax-Exempt
established. U.S. Investors
Ltd .
There are a number of structural approaches
employed by off-shore hedge funds to
accommodate different investors. This diagram Investments
is an example of one type of typical off-shore
Investments
hedge fund structure.
Source: "Structuring Offshore Hedge Funds,“ Hedge Fund Fundamentals, November 30, 2012. 12

13. How Hedge Funds Are Structured
General/Limited Partnership Model
In the general/limited partnership model, the general partner is responsible for
the operations of the fund.
General
Operational
Partnership
While limited partners can make investments into the partnership and
are liable only for their amounts paid-in.
Limited
Investors
Partnership
The second element of the two-tiered structure is the arrangement of the general
partnership. The general partner is the typical structure used for a limited liability
company. The general partner's responsibility is to market and manage the fund,
and perform any functions necessary in the normal course of business.
Source: "Hedge Fund Organizational Structure," Investopedia, 2009. 13

14. How Hedge Funds Are Structured
Fee Structure
Hedge funds fee structures differ from other types of investment
vehicles. Hedge funds typically charge investors a management fee,
usually 1-2% of the assets managed.
Most hedge funds also charge an incentive (or performance) fee of
anywhere between 10-20% of fund profits. The idea of the incentive
fee is to reward the fund manager for good performance. Managers
only collect an incentive fee when the fund is profitable, exceeding
the fund's previous high - called a high-water mark. This means that
if a fund loses 5% from its previous high, the manager will not collect
an incentive fee until he or she has first made up the 5% loss.
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15. How Hedge Funds Are Structured
Graphic Illustrating Typical Fee Structure
Fund Performance for Investor
New High Water Mark
20%
15%
Manager collects
performance fee on gain
10% High Water Mark
Manager
5% collects
performance fee
Value of initial on gain Below high water
investment
mark: no
performance fee
- 5%
Below high water
- 10% mark: no
performance fee
-15%
-20%
Year 1 Year 2 Year 3 Year 4
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16. How Hedge Funds Are Structured
Term Structure
The actual terms of partnership vary according to the fund, however they are usually based on a few
factors.
Subscriptions and redemptions:
A hedge fund subscription is when the investor applies to join a particular fund. A hedge fund redemption
is when the investor withdraws part or all of their investment from a particular fund.
Unlike other investment vehicles, hedge funds do not have daily liquidity. Some hedge funds offer
subscriptions and redemptions monthly, while others accept them only quarterly or annually. A typical
subscription would be for example, a pension fund investing $200 million in a hedge fund.
Lock-Ups:
A lock-up is the time period that an initial investment cannot be redeemed from the fund.
The most common lock-up is limited to one year. In certain cases, it could be a “hard lock”, which
prevents the investor from withdrawing funds for the full time period, while in other cases, an investor
can pay a penalty fee to withdraw funds before the expiration of the lock-up period.
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17. How Hedge Funds Are Structured
Summary
Hedge funds offer qualified investors a unique partnership, with the
ability to invest alongside the fund manager and across a variety of
financial instruments. Hedge funds’ market-neutral, or balanced,
approach to investing helps seek out positive returns and minimize
risk by investing in varied instruments over long- and short-term
periods.
Hedge funds’ investor base has evolved significantly over the years,
with 65% of global hedge fund assets currently held by institutional
investors such as pensions, endowments and foundations.
Most hedge funds are created as limited partnerships between the
fund manager and investors. While the specific structures of hedge
funds can vary, there are a few organizational characteristics that are
applicable across the industry.
17