Types of hedge fund structures

-

Structural Configurations of Hedge Funds: A Closer Look

In the world of hedge funds, the choice of legal vehicle is just the beginning. How these vehicles are structured can significantly impact how funds operate, attract investors, and meet regulatory requirements. Here, we delve into the most common structural configurations used for hedge funds:

1. Stand-alone funds: Stand-alone funds are the simplest and most straightforward configuration. They involve a single vehicle, which can be an exempted company, a partnership, or a unit trust, pursuing a single investment strategy. These are often used in startup scenarios or when the target market doesn't require the complexity of a master-feeder structure. Even if a fund operates on a fund-of-fund basis, it remains a stand-alone vehicle, investing its own capital into other funds.

2. Master-feeder funds: In a master-feeder structure, multiple funds (feeder funds) pool their assets and invest them substantially into a separate vehicle known as the master fund. Typically, the same investment manager oversees both the feeder and master funds. The master fund becomes the primary investment vehicle for the feeder funds, executing the same investment strategy. Investors purchase shares in the feeder funds, which, in turn, purchase equivalent shares in the master fund. This structure is beneficial because it reduces trading costs for the investment manager, and it allows for different entities to comply with various regulatory environments for different target investors. Commonly, a Cayman Islands exempted company serves as the master fund, with a similar company for non-US investors, and a Delaware limited liability company for US taxable investors.

3. Parallel funds: Parallel funds are structured similarly to master-feeder funds, but with a key difference: each fund within the parallel structure operates independently and invests alongside the others. While structurally each parallel fund is a stand-alone entity, they are typically part of a single segregated portfolio company (SPC) in the Cayman Islands. This structure accommodates specific investor needs while maintaining separate investments.

4. Umbrella funds: Umbrella funds are single vehicles that pursue multiple investment strategies, allowing for the exchange of investors' interests between strategies. Historically, this was achieved using separate share classes and constitutional documents for corporate vehicles. Today, SPCs are a preferred choice for corporate umbrella funds, as they allow for segregation of assets within a single vehicle. Investors in umbrella funds often have the flexibility to switch between portfolios, typically facilitated through redemptions and issuances. Unit trusts are also common for umbrella structures, with trust documents outlining the ring-fencing and fund-switching arrangements between sub-trusts. Umbrella structures are well-suited for multi-issuance fund programs.

Each structural configuration has its unique advantages and is chosen based on the specific needs of the fund, the regulatory environment, and investor preferences. These configurations provide flexibility and adaptability for hedge fund managers catering to diverse investor bases and investment strategies.

Popular posts from this blog

Equalization accounting

-
Image
Equalization accounting Historically, hedge funds typically provide for some form of performance-based compensation to the investment manager of the hedge fund (as set out above under section 3).   This has generally been a percentage of the increase in the gross assets over the prior high water mark.  For example, if the prior performance fee period had a net asset value of 100 and the following period's net asset value was 120 then the further performance fee for the period will be paid on the amount of that increase which is 20 and the high water mark for this following period would be set at 120. Thereafter if the net asset value fell below 120, no performance fee would be payable.  Although relatively simple to understand, there were certain situations where individual shareholders would suffer a fee not in line with performance and, consequently, the investment manager would receive either too large or  too small a fee relative to the individual shareholder's perfor
Read more

PERFORMANCE FEE EQUALISATION

-
Image
When setting up a fund, one of the first decisions a manager has to make is the choice of fund structure. Partnership structures are very common in US domestic funds because they offer tax transparency to investors. Accounting calculations for partnership structures are relatively straightforward. Individual capital accounts are maintained for each partner and performance fees are calculated at the capital account level per partner. Therefore, there are no equalization issues for managers to contend with.   In Europe, a combination of other fund structures is frequently used which requires calculations of per share/unit price.   In calculating performance fees in these structures, the overriding concern among managers has been in determining how to fairly reward the manager for positive performance while at the same time ensuring investors are treated equitably. Essentially, this is where the various forms of performance fee Equalisation come in.   One of the most common
Read more

Equity Swap - Accounting

-
1. Learning Objectives Gain an understanding of the three primary components of equity swaps. Recognize distinctive features of equity swaps. Comprehend the motivations behind investors engaging in equity swap transactions. 2. Content An equity swap is an over-the-counter (OTC) derivative where two parties exchange cash flows. One cash flow mirrors the performance of a commonly traded stock, while the other represents interest. Cash changes hands solely at the contract's closure, either during a sale or a cover transaction, which is a characteristic shared with most derivatives. 2.1. Three Profit/Loss Components of an Equity Swap 2.1.1. Equity Leg This component reflects the performance of the underlying stock. 2.1.2. Interest Leg or Financing Leg This component signifies the interest payment the "long" side of the contract pays to the "short" side in return for benefiting from the stock's performance. Consequently, the "long" side is termed the &q
Read more