Forming a Hedge Fund

Generally, a hedge fund manager registered as an investment adviser may receive performance-based compensation from its investors, if each of the investors is a “qualified client.”

Under the Investment Advisers Act of 1940, a person is deemed to be a qualified client if the hedge fund manager has a reasonable belief that the investor has a net worth in excess of $1,500,000 at the time of investment or the investor has at least $750,000 under the management with the manager. Certain states, however, use a lower standard, whereby an investor must have a net worth in excess of $1,000,000 or assets of $500,000 under management with the hedge fund manager. There are additional restrictions imposed on managers who are registered as an investment adviser by states utilizing the lower standard.

Non-U.S. persons are not required to meet the requirements of a “Qualified Client”.