How are most hedge funds structured? My friend is in the process of creating one.
fund manager + leverage + suckers’ capital = hedge fund
Your friend needs to know a good deal more than that. I’m convinced the way to go is the following: Two LLC’s DitchDigger Capital, LLC and DitchDigger Investments, LLC. Capital exists to be a partner in the fund and receive allocations (your pay). Investments exists to own the intellectual property and pay the rent. When you bring in someone new, they get to be a partner in Capital but not Investments so they never have a claim on your intellectual property. Each fund (e.g., DitchDigger Global Macro Fund) you create is an LP, preferably in BVI or the Caymans. Capital is the GP in all the funds. A new investor is a partner in the Macro Fund. As you get bigger, you need to think about master-feeder structures. To do this you pretty much need to read a book or two on it or plan on spending lots of money for idiot lawyers to cut and paste something. Edit: This may be helpful http://www.hedgefundworld.com/forming_a_hedge_fund.htm BTW an LLP is a limited liability company for lawyers or MD’s or something where people want to be protected from their partners liabilities. It’s probably not appropriate for a hedge fund.
Aren’t 90% of HFs incorporated in the Cayman Islands or something?
The fund is (BVI is cheaper and accomplishes the same thing). If you do it domestically then foreign investors are subject to withholding tax. They hate that.
He simply wants to set up a business of his trading strategy. At this time his family is giving him money to invest. I simply said I would help out where I can since I’m no longer employed as of Monday. Hedge fund may have been the wrong term to use. He simply needs something to set up so he is not personally liable for all of the taxes incurred.
Everyone wants to call themselves a hedge fund… Anyway, in this case all he really needs is trading authority on an account. An LLC is a decent idea to protect his stuff from the inevitable lawsuit. Form DitchDigger Capital, LLC (simple). Have family members put money at his favorite broker. Sign the paper that gives him trading authority. Do not give him power of attorney or (much worse) jointly title the accounts with his name. Sometimes trading authority is as easy as giving him the password. These things always lead to ruin. So my best advice is for him to stay away. His trading strategy is going to cost his family lots of taxes and transactions fees (since he seems not to know much about taxes) and give substandard returns, That makes family get togethers tough.