Forming a Hedge Fund

A hedge fund manager may receive several forms of compensation. The manager often receives a performance allocation equal to a percentage (usually 20%) of realized and unrealized appreciation of the hedge fund’s assets payable on a yearly basis. In addition, the manager typically receives a management fee equal to a percentage (e.g., 1% annually) of assets under management, which is payable quarterly or monthly. When two management entities are used, ordinarily the general partner receives the performance allocation and the investment manager receives the management fee. In such instances, the investment manager is responsible for managing the Master Fund’s assets, and for paying the hedge fund manager’s overhead expenses (e.g., rent, furniture, equipment) and employing the manager’s personnel. The general partner, however, is more “passive”, and will not typically employ any direct personnel.