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.


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