One of the first things you will need to decide is how to structure your hedge fund. This article will help you understand some of the commonly used hedge fund structures to get you started.

Domestic Limited Partnership Structure

Most domestic hedge funds are organized as a limited liability (mainly for tax purposes). The typical structure has one general partner and many limited partners. The hedge fund receives its funds from the general partner and limited partners. Most hedge funds have no direct employees.

The general partner does not have to be an individual; it could be another business entity. Having a business entity, which is typically structured as a S corporation or LLC, serve as the general partner protects individuals from the unlimited liability that the general partner is exposed to.

The hedge fund, which is managed by the general partner, then hires a management company to make investment decisions. Often, the management company and the general partner is the same entity. This structure is called the "nested structure".

Offshore Hedge Fund: Master-Feeder Structure

Since most offshore hedge funds are domiciled in jurisdictions with little or no taxes, most are structured as corporation since it is easier to administer the fund as a corporation than as a LP.

Offshore investors typically do not want to invest in U.S.-based funds because this exposes them to U.S. taxes while U.S. investors do not want to invest in offshore hedge funds because it complicates their tax returns.

The solution is to create a master-feeder structure. First, create both a domestic and offshore fund. The domestic investors will invest in the domestic fund and the offshore investors will invest in the offshore fund. However, the sole purpose of the domestic fund is to invest in the offshore fund. The offshore fund will then invest in securities and carry all positions. This way, all investors will have the same performance.