Section One: Structure & Control

1.1 Legal Services

Determining the legal partner and outside counsel for the fund manager is a critical early decision when beginning the process of starting the company. The outside counsel will need to be involved in all conversations about the company and fund structure and will review all key servicing agreements for both the management company and the fund. Having legal counsel in place allows the principals to navigate an early maze of options and variables relating to where the different companies need to be incorporated and the implications of those foundational decisions. The choice of legal partner is critical to making the right decisions from the outset.

Your legal partner will work with you closely on the following steps to create the fund and the management company:

An initial step in forming your frm is choosing a name for your fund and your management company. Have your legal counsel confrm that the desired name is available and can be registered. It is worthwhile also confrming the Internet presence for the name and the availability of websites and emails with the name included or abbreviated. Your legal counsel will run a check on the name and any Intellectual Property (“IP”) rights associated with it, or with any affliated names.

Fund Structures & Domiciles

The domicile you choose will largely be a factor in who your investors are and their specifc tax status. Funds with investors in only the country of origin can establish an onshore company

but the vast majority of funds set up as both an onshore limited partnership (LP) or limited liability company (LLC) and an offshore corporation, which both feed an offshore ‘Master Feeder’ or ‘Parallel’ fund structure. The vast majority of hedge funds in the U.S. choose the Master Feeder Structure and the benefts are listed in Chart 2.

In the United States the most common onshore state in which to register the LP or LLC is Delaware, whereas in Europe, onshore typically refers to Dublin or Luxemburg, and in Asia the domicile can vary widely. For the offshore entity, the most common registrations are the Cayman Island, British Virgin Islands, Isles of Man, Bermuda, or Mauritius for the Asia-based funds.

While offshore jurisdictions all provide low-cost, low-tax environments for the principle fund vehicle to reside, the tax jurisdiction of the investor is equally important in order to determine the full implications of making a domicile decision.

The onshore management company, typically an LLC or LP, offers its members limited liability and more importantly fow-through tax treatment in the same way that a partnership passes the tax obligation back to the partner. Operating agreements for the management company are typically drawn up between the managing partners in order to provide for resolution of any governance or oversight issues.

Your legal counsel will offer advice on all possible structures and this structural decision is one of the frst required in establishing the fund and the company.

The following chart illustrates a typical U.S. Master Feeder fund structure with both the onshore and offshore sides of the fund. Foreign investors invest in the offshore corporation and take a Limited Partnership interest in the offshore company, and the investment portfolio is legally overseen by the offshore company. The management company is registered onshore (typically Delaware) and acts as the investment adviser to the offshore fund. The onshore LP is managed by the management company, which acts as the General Partner (GP) to the investment company for onshore investors.