Forming a Hedge Fund

For the purpose of managing the assets of persons residing in the United States, a hedge fund is ordinarily organized as a limited partnership. By purchasing an interest in the partnership, an investor becomes a limited partner of the partnership.

In an attempt to limit personal liability, the manager of a domestic fund usually forms an entity to provide advisory services to the partnership. This entity serves as the general partner of the partnership. Depending on the laws of the state in which the general partner will be domiciled, the hedge fund manager will organize the general partner as a limited liability company, corporation or limited partnership. In certain cases, the manager will form two entities, one entity to serve as the general partner and the other entity to serve as a management company, commonly known as the investment manager.

The use of an entity as the general partner or investment manager, however, will not shield an individual manager from personal liability for fraud and other claims under the federal securities laws.