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Paperwork Required for Hedge Fund Purchases

After you and your hedge fund manager decide to work together, the next stage in the process is the purchase. However, before you can sign the partnership agreement and hand over your money, you and the manager have to fulfill basic paperwork requirements and tax forms.

The U.S. Treasury Department’s Financial Crimes Informant Network, which investigates money laundering, requires financial institutions to have enforcement procedures in place to verify that new investments aren’t made from ill-gotten funds.

Hence, the hedge fund’s staff must verify that they know who the investors in the fund are and where their money came from. You have to provide the following when you open a hedge fund account:

  • Name

  • Date of birth

  • Street address

  • Place of business

  • Social Security number or taxpayer identification number

  • Copies of financial statements from banks, brokerages, and other accounts showing that you’re accredited and that you have enough money to meet the initial investment

If you want to open an individual account, you should also be prepared to provide your driver’s license and passport. If you want to open an institutional account, you have to provide certified articles of incorporation, a government-issued business license, or a trust instrument.

You also have forms to fill out for tax reporting down the road. IRS Form W9, for example, keeps your taxpayer information on record.

Each year, you’ll receive a K-1 form from the fund, which reports your share of the hedge fund’s profits. (The hedge fund itself files Form 1065 with the IRS.) As a partner, you need to report your share of the fund’s earnings to the IRS, even if you haven’t received any cash. This is a different reporting structure from most other forms of investment income, which are usually reported on 1099 forms and handled through Schedule B and Schedule D of IRS Form 1040.

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