Editing Hedge fund (section)

==Structure==
A hedge fund is an [[Investment fund|investment vehicle]] that is most often structured as an [[offshore corporation]], [[limited partnership]], or [[limited liability company]].<ref>Gerald T. Lins, Thomas P. Lemke, Kathryn L. Hoenig & Patricia Schoor Rube, ''Hedge Funds and Other Private Funds: Regulation and Compliance'' §§ 2:7–2:12 (2013–2014 ed.).</ref> The fund is managed by an [[investment management|investment manager]] in the form of an organization or company that is legally and financially distinct from the hedge fund and its portfolio of [[asset]]s.<ref name=BusinessKnowledge>{{cite book |url=https://books.google.com/books?id=uI-cJ0ZAf5sC&q=hedge+fund+no+employees&pg=PA122 |title=Business Knowledge for IT in Hedge Funds |year=2008 |isbn=978-0-9554124-5-5 |publisher=Essvale Corporation Limited |page=122}}</ref><ref name=StrachmanBook2>{{cite book |first=Daniel A. |last=Strachman |title=The Fundamentals of Hedge Fund Management |year=2012 |isbn= 978-1-118-15139-6 |publisher=Wiley |location=Hoboken, New Jersey |page=47 }}</ref> Many investment managers utilize service providers for operational support.<ref name=StrachmanBook3>{{cite book |first=Daniel A. |last=Strachman |title=The Fundamentals of Hedge Fund Management |year=2012 |isbn= 978-1-118-15139-6 |publisher=Wiley |location=Hoboken, New Jersey |page=23 }}</ref> Service providers include prime brokers, banks, administrators, distributors, and accounting firms.

===Prime broker===
[[Prime broker]]s [[clearing (finance)|clear]] [[trade]]s and provide leverage and short-term [[financing]].<ref name=Anson3/><ref name=Stowell>{{cite book |url=https://books.google.com/books?id=B5624MOzmHwC&q=prime+broker+hedge+funds+investment+banks&pg=PT275 |first=David |last=Stowell |title=Investment Banks, Hedge Funds, and Private Equity |year=2012 |publisher=Academic Press |isbn=978-0-12-415820-7}}</ref> They are usually divisions of large investment banks.<ref name=Stowell4>{{cite book |url=https://books.google.com/books?id=5G5pj7SRIwMC&q=Prime+brokers+are+usually+divisions+of+large+investment+banks&pg=PA101 |first=David |last=Stowell |title=An Introduction to Investment Banks, Hedge Funds, and Private Equity|year=2010 |isbn=978-0-12-374503-3 |publisher=Academic Press |page=101}}</ref> The prime broker acts as a [[counterparty]] to [[Derivative (finance)|derivative contracts]], and lends securities for particular investment strategies, such as [[Long/short equity|long/short equities]] and [[Convertible arbitrage|convertible bond arbitrage]].<ref name=Athanassiou>{{cite book |url=https://books.google.com/books?id=zcgH-EBCa48C&q=prime+broker+counterparty+derivative+contracts&pg=PA283 |first=Phoebus |last=Athanassiou |title=Research Handbook on Hedge Funds, Private Equity and Alternative Investments |year=2012 |publisher=Edward Elgar Publishing |page=283 |isbn=978-1-84980-278-9}}</ref><ref name=Fabozzi>{{cite book |url=https://books.google.com/books?id=7LOD1CmBD-cC&q=prime+broker+lending+securities&pg=PA749 |first=Frank J. |last=Fabozzi |title=Handbook of Finance, Financial Markets and Instruments |year=2008 |publisher=Wiley |page=749 |isbn=978-0-470-07814-3}}</ref> It can provide [[custodian bank|custodial services]] for the fund's assets, and trade execution and clearing services for the hedge fund manager.<ref name=Lhabitant3>{{cite book |url=https://books.google.com/books?id=zVubHUSOxpoC&q=prime+broker+custodial&pg=SA4-PA2 |title=Handbook of Hedge Funds |pages=1–4 |first= François-Serge |last=Lhabitant |year=2007 |publisher=John Wiley & Sons |isbn=978-0-470-02663-2}}</ref>

===Administrator===
[[Fund administration|Hedge fund administrators]] are typically responsible for [[Valuation (finance)|valuation]] services, and often [[Operations management|operations]], and [[Accountancy|accounting]].

Calculation of the [[net asset value]] ("NAV") by the administrator, including the pricing of securities at current market value and calculation of the fund's income and expense accruals, is a core administrator task, because it is the price at which investors buy and sell shares in the fund.<ref name=autogenerateda>{{Cite web |url=http://files.irishfunds.ie/1433105561-2009-9-guide-to-sound-practices-for-hedge-fund-administrators.pdf |title=''Guide to Sound Practices for Hedge Fund Administrators'' |access-date=7 February 2019 |archive-url=https://web.archive.org/web/20171202125611/https://files.irishfunds.ie/1433105561-2009-9-guide-to-sound-practices-for-hedge-fund-administrators.pdf |archive-date=2 December 2017 |url-status=live |df=dmy-all }}</ref> The accurate and timely calculation of NAV by the administrator is vital.<ref name=autogenerateda/><ref>{{Cite web |url=https://www.iomfsa.im/media/2320/soundpracticeguidelines.pdf |title=Sound Practice Guidelines for Administrators of Alternative Funds including Experienced Investor Funds in the Isle of Man |access-date=7 February 2019 |archive-url=https://web.archive.org/web/20190207015409/https://www.iomfsa.im/media/2320/soundpracticeguidelines.pdf |archive-date=7 February 2019 |url-status=live |df=dmy-all }}</ref> The case of ''Anwar v. Fairfield Greenwich'' (SDNY 2015) is the major case relating to fund administrator liability for failure to handle its NAV-related obligations properly.<ref name=autogeneratedb>{{Cite web |url=https://www.nixonpeabody.com/en/ideas/articles/2016/05/10/madoff-anwar-case-with-235-million-in-settlement-monies-finally-comes-to-a-close |title=Madoff Anwar case, with $235 million in settlement monies, finally comes to a close |access-date=7 February 2019 |archive-url=https://web.archive.org/web/20190207015945/https://www.nixonpeabody.com/en/ideas/articles/2016/05/10/madoff-anwar-case-with-235-million-in-settlement-monies-finally-comes-to-a-close |archive-date=7 February 2019 |url-status=live |df=dmy-all }}</ref><ref name=autogeneratedc>[https://www.law360.com/articles/691802/the-citco-settlement-and-what-lies-ahead-for-pwc "The Citco Settlement And What Lies Ahead For PwC"], {{Webarchive|url=https://web.archive.org/web/20190207020039/https://www.law360.com/articles/691802/the-citco-settlement-and-what-lies-ahead-for-pwc |date=7 February 2019}} Law360.</ref> There, the hedge fund administrator and other defendants settled in 2016 by paying the ''Anwar'' investor plaintiffs $235 million.<ref name=autogeneratedb/><ref name=autogeneratedc/>

Administrator [[back office]] support allows fund managers to concentrate on trades.<ref name=Lhabitant2>{{cite book |url=https://books.google.com/books?id=zVubHUSOxpoC&q=hedge+fund+administrator+back+office&pg=SA4-PA7 |title=Handbook of Hedge Funds |page=4-2 |first= François-Serge |last=Lhabitant |year=2007 |publisher=John Wiley & Sons |isbn=978-0-470-02663-2}}</ref> Administrators also process [[Subscription (finance)|subscriptions]] and redemptions and perform various shareholder services.<ref name=BusinessKnowledge2>{{cite book |url=https://books.google.com/books?id=uI-cJ0ZAf5sC&q=hedge+fund+administrator+subscription&pg=PA121 |title=Business Knowledge for IT in Hedge Funds |year=2008 |isbn=978-0-9554124-5-5 |publisher=Essvale Corporation Limited |page=121}}</ref><ref name=Vishwanath>{{cite book |url=https://books.google.com/books?id=oowq_PkME3UC&q=hedge+fund+administrator+subscription&pg=PA596 |last1=Vishwanath |first1=Ramanna |last2=Krishnamurti |first2=Chandrasekhar |title=Investment Management: A Modern Guide to Security Analysis and Stock Selection |year=2009 |isbn=978-3-540-88801-7 |publisher=Springer |page=596}}</ref> Hedge funds in the United States are not required to appoint an administrator and all of these functions can be performed by an investment manager.<ref name=Nelken>{{cite book |url=https://books.google.com/books?id=Hn_Qg43bKX8C&q=hedge+fund+administrator+NAV+US+investment+manager&pg=PA51 |title=Hedge Fund Investment Management |first=Izzy |last=Nelken |isbn=978-0-7506-6007-5 |publisher=Butterworth-Heinemann |year=2005 |page=51}}</ref> A number of [[conflict of interest]] situations may arise in this arrangement, particularly in the calculation of a fund's net asset value.<ref name=Jorian>{{cite book |url=https://books.google.com/books?id=bGQxlDjujmMC&q=Hedge+fund+NAV+outside+of+US+investment+manager&pg=PA421 |title=Financial Risk Manager Handbook |first=Philippe |last=Jorion |publisher=Wiley |year=2009 |isbn=978-0-470-47961-2 |page=421}}</ref> Most funds employ external [[auditor]]s, thereby arguably offering a greater degree of transparency.<ref name=Nelken/>

=== Auditor ===
An auditor is an independent [[accounting]] firm used to perform a complete [[audit]] the fund's [[financial statement]]s. The year-end audit is performed in accordance with the [[standard accounting practices]] enforced within the country in which the fund it established, typically [[Generally Accepted Accounting Principles (United States)|US GAAP]] or the [[International Financial Reporting Standards]] (IFRS).<ref name="StrachmanAudit">{{cite book|last=Strachman|first=Daniel A.|url=https://books.google.com/books?id=4YsogxfEsNQC&pg=PA187|title=The Fundamentals of Hedge Fund Management|publisher=Wiley|year=2012|isbn=978-1-118-15139-6|page=187|access-date=11 March 2016|archive-url=https://web.archive.org/web/20160810014719/https://books.google.com/books?id=4YsogxfEsNQC&pg=PA187|archive-date=10 August 2016|url-status=live|df=dmy-all}}</ref> The auditor may verify the fund's NAV and [[assets under management]] (AUM).<ref name="Agarwal">{{cite book|last=Agarwal|first=Monty|url=https://books.google.com/books?id=IvWcNW4r4PUC&pg=PA66|title=The Future of Hedge Fund Investing: A Regulatory and Structural Solution for a Fallen Industry|publisher=Wiley|year=2009|isbn=978-0-470-53744-2|pages=65–66|access-date=11 March 2016|archive-url=https://web.archive.org/web/20160811060405/https://books.google.com/books?id=IvWcNW4r4PUC&pg=PA66|archive-date=11 August 2016|url-status=live|df=dmy-all}}</ref><ref>{{cite book|last=Scharfman|first=Jason A.|url=https://books.google.com/books?id=32cGd1V4A5sC&pg=PT32|title=Hedge Fund Operational Due Diligence: Understanding the Risks|publisher=Wiley|year=2009|isbn=978-0-470-37234-0|access-date=11 March 2016|archive-url=https://web.archive.org/web/20160810032244/https://books.google.com/books?id=32cGd1V4A5sC&pg=PT32|archive-date=10 August 2016|url-status=live|df=dmy-all}}</ref> Some auditors only provide "NAV lite" services, meaning that the valuation is based on prices received from the manager rather than an independent assessment.<ref name="StrachmanHedgeNAV">{{cite book|last=Strachman|first=Daniel A.|url=https://books.google.com/books?id=4YsogxfEsNQC&q=hedge+fund+auditor+all+NAVs&pg=PA187|title=The Fundamentals of Hedge Fund Management|publisher=Wiley|year=2012|isbn=978-1-118-15139-6|page=187}}</ref>

===Distributor===
A distributor is an [[underwriter]], [[broker]], [[Broker-dealer|dealer]], or other person who participates in the distribution of securities.<ref name=FATCA>{{cite web |url=http://www.pwc.com/en_US/us/asset-management/investment-management/publications/assets/pwc-fatca-proposed-regulations.pdf |title=Foreign Account Tax Compliance Act (FATCA) Proposed Treasury Regulations |publisher=PricewaterhouseCoopers LLP |access-date=31 October 2012 |page=153 |archive-url=https://web.archive.org/web/20130608070657/http://www.pwc.com/en_US/us/asset-management/investment-management/publications/assets/pwc-fatca-proposed-regulations.pdf |archive-date=8 June 2013 |url-status=live |df=dmy-all }}</ref> The distributor is also responsible for marketing the fund to potential investors. Many hedge funds do not have distributors, and in such cases, the investment manager will be responsible for the distribution of securities and marketing, though many funds also use [[placement agent]]s and broker-dealers for distribution.<ref>{{cite book |url=https://books.google.com/books?id=mCRSNZ40v6MC&q=placement+agents+hedge+fund&pg=PT158 |title=AARP Getting Started in Hedge Funds: From Launching a Hedge Fund to New Regulation, the Use of Leverage, and Top Manager Profiles |first=Daniel A. |last=Strachman |year=2011 |publisher=Wiley |page=93|isbn=978-1-118-24172-1 }}</ref><ref name=Nelken2>{{cite book |url=https://books.google.com/books?id=Hn_Qg43bKX8C&q=hedge+fund+marketing+investor+broker&pg=PA93 |title=Hedge Fund Investment Management |first=Izzy |last=Nelken |year=2005 |isbn=978-0-7506-6007-5 |publisher=Butterworth-Heinemann |page=51}}</ref>

===Domicile and taxation===
The legal structure of a specific hedge fund, in particular its [[domicile (law)|domicile]] and the type of [[legal person|legal entity]] in use, is usually determined by the tax expectations of the fund's investors. [[#Offshore|Regulatory considerations]] will also play a role. Many hedge funds are established in [[Offshore Financial Centre|offshore financial centers]] to avoid adverse tax consequences for its foreign and tax-exempt investors.<ref name=Fraser-Sampson>{{cite book |url= https://books.google.com/books?id=AA017P5CIssC&q=hedge+fund+legal+structure+offshore&pg=PA112 |first= Guy |last= Fraser-Sampson |title= Alternative Assets: Investments for a Post-Crisis World |year=2010 |isbn= 978-0-470-66137-6 |publisher= Wiley |page=112}}</ref><ref name=Anson2>{{cite book |url= https://books.google.com/books?id=Hqgyll9MgkcC&q=hedge+fund+domicile+legal+structure&pg=PA174 |first=Mark J. P. |last=Anson |title=CAIA Level I: An Introduction to Core Topics in Alternative Investments |year=2009 |isbn=978-0-470-44702-4 |publisher=Wiley |pages=174–175}}</ref> [[Offshore fund]]s that invest in the US typically pay [[withholding tax]]es on certain types of investment income, but not US [[capital gains tax]]. However, the fund's investors are subject to tax in their own jurisdictions on any increase in the value of their investments.<ref name=StrachmanHedge>{{cite book |url=https://books.google.com/books?id=4YsogxfEsNQC&q=Offshore+funds+withholding+taxes+capital+gains&pg=PA88 |first=Daniel A. |last=Strachman |title=The Fundamentals of Hedge Fund Management |year=2012 |isbn= 978-1-118-15139-6 |publisher=Wiley |pages=88–89}}</ref><ref name=StrachmanHedge2>{{cite book |url=https://books.google.com/books?id=4YsogxfEsNQC&q=offshore+funds+pension+plan+endowment&pg=PA54 |first=Daniel A. |last=Strachman |title=The Fundamentals of Hedge Fund Management |year=2012 |isbn= 978-1-118-15139-6 |publisher=Wiley |pages=52–54}}</ref> This tax treatment promotes cross-border investments by limiting the potential for multiple jurisdictions to layer taxes on investors.<ref name=Muraleedharan>{{cite book |url=https://books.google.com/books?id=RX_dLGtIE3AC&q=Muraleedharan+offshore+funds+cross-border&pg=PA162 |first=D. |last=Muraleedharan |title=Modern Banking: Theory and Practice |year=2009 |isbn=978-81-203-3655-1 |publisher=Wiley |page=162}}</ref>

US tax-exempt investors (such as [[pension|pension plans]] and [[financial endowment|endowments]]) invest primarily in offshore hedge funds to preserve their [[tax exemption|tax exempt]] status and avoid unrelated business [[taxable income]].<ref name=StrachmanHedge2/> The investment manager, usually based in a major financial center, pays tax on its management fees per the tax laws of the state and country where it is located.<ref name=Stowell2>{{cite book |url=https://books.google.com/books?id=5G5pj7SRIwMC&q=offshore+funds+tax+fee+investment+manager&pg=PA267 |first=David |last=Stowell |title=An Introduction to Investment Banks, Hedge Funds, and Private Equity|year=2010 |isbn=978-0-12-374503-3 |publisher=Academic Press |page=267 |quote=For offshore funds, the fund pays management and incentive feeds to the management company (which is taxed as ordinary income.)}}</ref> In 2011, half of the existing hedge funds were registered offshore and half onshore. The [[Cayman Islands]] was the leading location for offshore funds, accounting for 34% of the total number of global hedge funds. The US had 24%, [[Luxembourg]] 10%, [[Ireland]] 7%, the [[British Virgin Islands]] 6%, and [[Bermuda]] had 3%.<ref name="TheCityUk">{{cite web |url=http://www.thecityuk.com/assets/Uploads/Hedge-Funds-2012-F.pdf |archive-url=https://web.archive.org/web/20120615164309/http://www.thecityuk.com/assets/Uploads/Hedge-Funds-2012-F.pdf |url-status=dead |archive-date=15 June 2012 |author=TheCityUK |title=Hedge Funds: March 2012 |year=2012 |publisher=Jersey Finance |page=4 |access-date=12 October 2012 }}</ref>

Hedge funds take advantage of a tax loopole called carried interest to get around paying too much in taxes by fancy legalistic maneouvres on their part.<ref>{{cite web |url=http://www1.realclearmarkets.com/2012/02/01/carried_interest_the_scam_of_all_scams_123053.html |first=Matt |last=O'Brien |title=Carried Interest: The Scam of All Scams |access-date=1 May 2022 |archive-date=5 July 2022 |archive-url=https://web.archive.org/web/20220705114203/http://www1.realclearmarkets.com/2012/02/01/carried_interest_the_scam_of_all_scams_123053.html |url-status=dead }}</ref>

===Basket options===
{{blockquote|source=|Deutsche Bank and Barclays created special options accounts for hedge fund clients in the banks' names and claimed to own the assets, when in fact the hedge fund clients had full control of the assets and reaped the profits. The hedge funds would then execute trades – many of them a few seconds in duration – but wait until just after a year had passed to exercise the options, allowing them to report the profits at a lower long-term capital gains tax rate.| Alexandra Stevenson. July 8, 2015. ''[[The New York Times]]''}}

The US [[Senate Permanent Subcommittee on Investigations]] chaired by [[Carl Levin]] issued a 2014 report that found that from 1998 and 2013, hedge funds avoided billions of dollars in taxes by using basket options. The [[Internal Revenue Service]] began investigating [[Renaissance Technologies]]<ref name="NYT_2015_dec_30">{{cite news | url=https://www.nytimes.com/2015/12/30/business/economy/for-the-wealthiest-private-tax-system-saves-them-billions.html?emc=edit_na_20151229&nlid=50121183&ref=headline&_r=0 | title=For the Wealthiest, a Private Tax System That Saves Them Billions: The very richest are able to quietly shape tax policy that will allow them to shield billions in income | work=The New York Times | date=29 December 2015 | access-date=31 December 2015 | author1=Scheiber, Noam | author2=Cohendec, Patricia | archive-url=https://web.archive.org/web/20170709065645/https://www.nytimes.com/2015/12/30/business/economy/for-the-wealthiest-private-tax-system-saves-them-billions.html?emc=edit_na_20151229&nlid=50121183&ref=headline&_r=0 | archive-date=9 July 2017 | url-status=live | df=dmy-all }}</ref> in 2009, and Levin criticized the IRS for taking six years to investigate the company. Using basket options Renaissance avoided "more than $6 billion in taxes over more than a decade".<ref name="NYT_2015_07"/>

{{blockquote|source=|These banks and hedge funds involved in this case used dubious structured financial products in a giant game of 'let's pretend,' costing the Treasury billions and bypassing safeguards that protect the economy from excessive bank lending for stock speculation.|[[Carl Levin]]. 2015. Senate Permanent Subcommittee on Investigations}}

A dozen other hedge funds along with Renaissance Technologies used [[Deutsche Bank]]'s and [[Barclays]]' basket options.<ref name="NYT_2015_07">{{cite news | url=https://www.nytimes.com/2015/07/09/business/dealbook/irs-cracks-down-on-hedge-fund-tax-strategy.html?action=click&contentCollection=Economy&module=RelatedCoverage&region=Marginalia&pgtype=article | title=I.R.S. Cracks Down on Hedge Fund Tax Strategy | work=The New York Times | date=8 July 2015 | access-date=31 December 2015 | author=Stevenson, Alexandra | archive-url=https://web.archive.org/web/20160103012026/http://www.nytimes.com/2015/07/09/business/dealbook/irs-cracks-down-on-hedge-fund-tax-strategy.html?action=click&contentCollection=Economy&module=RelatedCoverage&region=Marginalia&pgtype=article | archive-date=3 January 2016 | url-status=live | df=dmy-all }}</ref> Renaissance argued that basket options were "extremely important because they gave the hedge fund the ability to increase its returns by borrowing more and to protect against model and programming failures".<ref name="NYT_2015_07"/> In July 2015, the United States Internal Revenue claimed hedge funds used basket options "to bypass taxes on short-term trades". These basket options will now be labeled as listed transactions that must be declared on tax returns, and a failure to do would result in a penalty.<ref name="NYT_2015_07"/>

===Investment manager locations===
In contrast to the funds themselves, investment managers are primarily located [[wikt:onshore|onshore]]. The United States remains the largest center of investment with US-based funds managing around 70% of global assets at the end of 2011.<ref name="TheCityUk"/> As of April 2012, there were approximately 3,990 investment advisers managing one or more private hedge funds registered with the [[Securities and Exchange Commission]].<ref name=SECDoddFrank>{{cite web |url=https://www.sec.gov/divisions/investment/imissues/df-iaregistration.pdf |title=Dodd-Frank Act Changes to Investment Adviser Registration Requirements – Preliminary Results |publisher=Securities and Exchange Commission |year=2012 |access-date=18 October 2012 |archive-url=https://web.archive.org/web/20121114122257/http://www.sec.gov/divisions/investment/imissues/df-iaregistration.pdf |archive-date=14 November 2012 |url-status=live |df=dmy-all }}</ref> New York City and the [[Gold Coast (Connecticut)|Gold Coast]] area of [[Connecticut]] are the leading locations for US hedge fund managers.<ref name=Satyajit>{{cite book |url=https://books.google.com/books?id=P1_mrWcDdxgC&q=hedge+fund+new+york+connecticut&pg=PA80 |title=Extreme Money: Masters of the Universe and the Cult of Risk |first= Satyajit |last= Das |author-link= Satyajit Das |year=2011 |publisher=FT Press |isbn= 978-0-13-279007-9 |pages=79–80}}</ref>

London was Europe's leading center for hedge fund managers, but since the [[Brexit]] referendum some formerly London-based hedge funds have relocated to other European financial centers such as [[Frankfurt]], [[Luxembourg]], [[La Défense|Paris]], and [[Dublin]], while some other hedge funds have moved their European offices back to New York City.<ref>{{cite web|title = Esma tells EU to stay vigilant of hedge fund relocation after Brexit|url = https://www.ft.com/content/6ca79298-8892-357c-ae24-d5e600195457|website = FT (Financial Times)|date = 13 July 2017|access-date = 30 October 2017|archive-url = https://web.archive.org/web/20171107011913/https://www.ft.com/content/6ca79298-8892-357c-ae24-d5e600195457|archive-date = 7 November 2017|url-status = live|df = dmy-all}}</ref><ref>{{cite web|title = Hedge funds and buyout groups look at leaving London|url = https://www.ft.com/content/5d03a36a-436b-11e6-9b66-0712b3873ae1|website = FT (Financial Times)|date = 6 July 2016|access-date = 30 October 2017|archive-url = https://web.archive.org/web/20171010212020/https://www.ft.com/content/5d03a36a-436b-11e6-9b66-0712b3873ae1|archive-date = 10 October 2017|url-status = live|df = dmy-all}}</ref> Before Brexit, according to EuroHedge data, around 800 funds located in the UK had managed 85% of European-based hedge fund assets in 2011.<ref name=TheCityUk/> Interest in hedge funds in Asia has increased significantly since 2003, especially in Japan, Hong Kong, and Singapore.<ref name=Lhabitant5>{{cite book |url=https://books.google.com/books?id=zVubHUSOxpoC&q=asia+hedge+funds&pg=SA2-PA59 |title=Handbook of Hedge Funds |first= François-Serge |last=Lhabitant |year=2007 |publisher=John Wiley & Sons |isbn=978-0-470-02663-2}}</ref> After Brexit, Europe and the US remain the leading locations for the management of Asian hedge fund assets.<ref name=TheCityUk/>

===Legal entity===
Hedge fund legal structures vary depending on location and the investor(s). US hedge funds aimed at US-based, taxable investors are generally structured as [[limited partnership]]s or limited liability companies. Limited partnerships and other [[Flow-through entity|flow-through taxation]] structures assure that investors in hedge funds are not subject to both entity-level and personal-level taxation.<ref name=Lhabitant3/> A hedge fund structured as a limited partnership must have a [[general partner]]. The general partner may be an individual or a corporation. The general partner serves as the manager of the limited partnership, and has [[unlimited liability]].<ref name=Anson3>{{cite book |url=https://books.google.com/books?id=ic75IjNy4mQC&q=limited+partnership+general+partner+manages+assets |first=Mark J. P. |last=Anson |title=CAIA Level I: An Introduction to Core Topics in Alternative Investments |year=2009 |isbn=978-0-470-44702-4 |publisher=Wiley |pages=22–23}}</ref><ref name=Nichols>{{cite book |url=https://books.google.com/books?id=t7RFuEqfipwC&q=entity+level+tax&pg=PA40 |title=Investing in Hedge Funds, Revised and Updated Edition |first= Joseph G. |last= Nicholas |year=2005 |publisher=Bloomberg Press |pages=40–41|isbn=978-1-57660-184-6}}</ref> The limited partners serve as the fund's investors, and have no responsibility for management or investment decisions. Their liability is limited to the amount of money they invest for partnership interests.<ref name=Nichols/><ref name=Lhabitant411>{{cite book |url=https://books.google.com/books?id=zVubHUSOxpoC&q=limited+liability+entity+hedge+fund+partner&pg=SA2-PA64 |title=Handbook of Hedge Funds |page=4.1.1 |first= François-Serge |last=Lhabitant |year=2007 |publisher=John Wiley & Sons |isbn=978-0-470-02663-2}}</ref> As an alternative to a limited partnership arrangement, U.S. domestic hedge funds may be structured as [[Limited liability company|limited liability companies]], with members acting as corporate shareholders and enjoying protection from individual liability.<ref name=BusinessKnowledge124>{{cite book |url=https://books.google.com/books?id=uI-cJ0ZAf5sC&q=limited+liability+entity+hedge+fund+partner&pg=PA124 |title=Business Knowledge for IT in Hedge Funds |year=2008 |isbn=978-0-9554124-5-5 |publisher=Essvale Corporation Limited |page=124}}</ref>

By contrast, [[Offshore financial centre|offshore]] corporate funds are usually used for non-US investors, and when they are domiciled in an applicable offshore [[tax haven]], no entity-level tax is imposed.<ref name=Fraser-Sampson/> Many managers of offshore funds permit the participation of tax-exempt US investors, such as [[Pension fund|pensions funds]], [[Endowment fund|institutional endowments]], and [[charitable trust]]s.<ref name=Nichols/> As an alternative legal structure, offshore funds may be formed as an [[open-end fund|open-ended]] [[unit trust]] using an unincorporated [[mutual fund]] structure.<ref name=FundAssociates>{{cite web |url=http://fundassociates.com/pdfs/Offshore_vs_Onshore_Funds_Whitepaper.pdf |title=Offshore Hedge Funds vs. Onshore Hedge Funds |year=2008 |publisher=Fund Associates |access-date=13 February 2013 |archive-url=https://web.archive.org/web/20130424181824/http://fundassociates.com/pdfs/Offshore_vs_Onshore_Funds_Whitepaper.pdf |archive-date=24 April 2013 |url-status=live |df=dmy-all }}</ref> Japanese investors prefer to invest in [[unit trust]]s, such as those available in the Cayman Islands.<ref name=StrachmanHedgeJapan>{{cite book |url=https://books.google.com/books?id=4YsogxfEsNQC&q=hedge+fund+unit+trusts+japanese&pg=PA43 |first=Daniel A. |last=Strachman |title=The Fundamentals of Hedge Fund Management |year=2012 |isbn= 978-1-118-15139-6 |publisher=Wiley |page=3 |quote=If you are marketing to Japanese investors; you must have a Cayman-based unit trust. This group of investors rarely, if ever, invests in a hedge fund that is not set up as a unit trust.}}</ref>

The investment manager who organizes the hedge fund may retain an interest in the fund, either as the general partner of a limited partnership or as the holder of "founder shares" in a corporate fund.<ref name=LhabitantInvestor>{{cite book |url=https://books.google.com/books?id=zVubHUSOxpoC&q=investment+manager+hedge+fund+founder+shares&pg=SA2-PA68 |title=Handbook of Hedge Funds |page=4.2.1 |first= François-Serge |last=Lhabitant |year=2007 |publisher=John Wiley & Sons |isbn=978-0-470-02663-2}}</ref> For offshore funds structured as corporate entities, the fund may appoint a [[board of directors]]. The board's primary role is to provide a layer of oversight while representing the interests of the shareholders.<ref name=LhabitantBoard>{{cite book |url=https://books.google.com/books?id=zVubHUSOxpoC&q=investment+manager+hedge+fund+founder+shares&pg=SA2-PA68 |title=Handbook of Hedge Funds |page=4.2.2 |first= François-Serge |last=Lhabitant |year=2007 |publisher=John Wiley & Sons |isbn=978-0-470-02663-2}}</ref> However, in practice board members may lack sufficient expertise to be effective in performing those duties. The board may include both affiliated directors who are employees of the fund and independent directors whose relationship to the fund is limited.<ref name=LhabitantBoard/>

===Types of funds===
*[[Open-end fund|Open-ended]] hedge funds continue to issue shares to new investors and allow periodic withdrawals at the [[net asset value]] ("NAV") for each share.
*[[closed-end fund|Closed-ended]] hedge funds issue a limited number of tradeable shares at inception.<ref>{{cite web |url=https://www.sec.gov/rules/proposed/ia-2266.htm#P300_115564 |title=Registration Under the Advisers Act of Certain Hedge Fund Advisers: footnote 141 |work=Securities and exchange Commission |access-date=22 April 2011 |archive-url=https://web.archive.org/web/20110309094344/http://www.sec.gov/rules/proposed/ia-2266.htm#P300_115564 |archive-date=9 March 2011 |url-status=live |df=dmy-all }}</ref><ref>{{cite journal |last1=Ineichen |first1=Alexander M. |year=2002 |title=Funds of Hedge Funds: Industry Overview |journal=[[Journal of Wealth Management]] |volume=47 |issue=4}}</ref>
*Shares of [[listing (finance)|Listed]] hedges funds are traded on [[stock exchange]]s, such as the [[Irish Stock Exchange]], and may be purchased by non-[[accredited investor]]s.<ref>{{cite news|last=Clarke|first=Geordie|title=Listed hedge funds: Lifting the smokescreen|url=http://www.ftadviser.com/2012/04/18/investments/investment-trusts/listed-hedge-funds-lifting-the-smokescreen-whvwTCj5PEeC10zwQRChvO/article.html|access-date=22 February 2013|newspaper=Financial Times|date=18 April 2012|archive-url=https://web.archive.org/web/20130527073300/http://www.ftadviser.com/2012/04/18/investments/investment-trusts/listed-hedge-funds-lifting-the-smokescreen-whvwTCj5PEeC10zwQRChvO/article.html|archive-date=27 May 2013|url-status=dead|df=dmy-all}}</ref>

===Side pockets===
A side pocket is a mechanism whereby a fund compartmentalizes assets that are relatively [[illiquid]] or difficult to value reliably.<ref name=Travers>{{cite book |url=https://books.google.com/books?id=fOUKPCVl29QC&pg=SA7-PA98 |title=Hedge Fund Analysis: An In-Depth Guide to Evaluating Return Potential and Assessing Risks |first=Frank J. |last=Travers |year=2012 |publisher=Wiley |isbn=978-1-118-17546-0}}</ref> When an investment is side-pocketed, its value is calculated separately from the value of the fund's main portfolio.<ref name=StrachmanBook>{{cite book |url=https://books.google.com/books?id=4YsogxfEsNQC&pg=PA63 |first=Daniel A. |last=Strachman |title=The Fundamentals of Hedge Fund Management |year=2012 |isbn= 978-1-118-15139-6 |publisher=Wiley |location=Hoboken, New Jersey |pages=63–64}}</ref> Because side pockets are used to hold illiquid investments, investors do not have the standard redemption rights with respect to the side pocket investment that they do with respect to the fund's main portfolio.<ref name=StrachmanBook/> Profits or losses from the investment are allocated on a ''[[pro rata]]'' basis only to those who are investors at the time the investment is placed into the side pocket and are not shared with new investors.<ref name=StrachmanBook/><ref name=Duc>{{cite book |url=https://books.google.com/books?id=jQ_W-2vqw-4C&pg=PA16 |title=Market Risk Management for Hedge Funds: Foundations of the Style and Implicit Value-at-Risk |last1=Duc |first1=Francois |last2=Schorderet |first2=Yann |year=2008 |publisher=Wiley |pages=15–17 |isbn=978-0-470-72299-2}}</ref> Funds typically carry side pocket assets "at cost" for purposes of calculating management fees and reporting net asset values. This allows fund managers to avoid attempting a valuation of the underlying investments, which may not always have a readily available [[market value]].<ref name=Duc/>

Side pockets were widely used by hedge funds during the [[2008 financial crisis]] amidst a flood of withdrawal requests. Side pockets allowed fund managers to lay away illiquid securities until market liquidity improved, a move that could reduce losses. However, as the practice restricts investors' ability to redeem their investments it is often unpopular and many have alleged that it has been abused or applied unfairly.<ref name=SECprobes>{{cite news |url=https://www.reuters.com/article/hedgefunds-sec-idUSN2713105420100428 |title=SEC probes hedge funds' use of side pockets-WSJ |work=Reuters |date=27 April 2010 |access-date=15 April 2013 |first=Joseph A. |last=Giannone |archive-url=https://web.archive.org/web/20131230234050/http://www.reuters.com/article/2010/04/28/hedgefunds-sec-idUSN2713105420100428 |archive-date=30 December 2013 |url-status=live |df=dmy-all }}</ref><ref>{{cite news |url=https://www.wsj.com/articles/SB115465505123626547 |title='Side-Pocket' Accounts Of Hedge Funds Studied |last1=Zuckerman |first1=Gregory |last2=Patterson |first2=Scott |date=4 August 2006 |work=The Wall Street Journal |access-date=18 April 2013 |archive-url=https://web.archive.org/web/20150327070810/http://www.wsj.com/articles/SB115465505123626547 |archive-date=27 March 2015 |url-status=live |df=dmy-all }}</ref> The SEC also has expressed concern about aggressive use of side pockets and has sanctioned certain fund managers for inappropriate use of them.<ref name=Lins>Gerald T. Lins, Thomas P. Lemke, Kathryn L. Hoenig & Patricia Schoor Rube, ''Hedge Funds and Other Private Funds: Regulation and Compliance'' § 5:23 (2013–2014 ed.).</ref>