Types of Hedge Fund Partnerships: General and Limited
Most hedge funds are structured as lightly (if at all) regulated investment partnerships, but that doesn’t mean that the partners within a fund are equal. Some partners stand on higher ground than others, and the structure of the fund affects the liability that investors may take on.
If you buy into a hedge fund, you enter into a partnership, and you need to know what rights and obligations you have — especially if something goes wrong.
A hedge fund’s general partners are the founders and money managers of the fund. These people have the following responsibilities:
Form the fund
Control the fund’s investment strategy
Collect the fees charged
Pay the bills
Distribute the bonuses
In exchange for their control, general partners take on unlimited liability in the fund, which means that their personal assets are at stake if the fund’s liabilities exceed its assets. Many general partners own their stakes through S corporations (an ownership structure for small businesses that under U.S. tax code provides owners with limited liability and tax advantages) or other structures that shield their personal assets.
The limited partners (often shortened to limiteds) of a hedge fund are the people who invest in the fund — yep, you. When investors give their money to the fund manager (a general partner) to invest, they take a stake in the fund as a business. Limited partners can come in many different flavors:
Individual investors, pension funds, or endowments
Brokerage firms or investment companies that are sponsoring the fund’s general partners
Other partnerships or corporations formed to make investments in hedge funds
Limited partnership has its drawbacks. Limited partners pay fees to the general partners for their management services. They have little or no say in the fund’s operations. And the fund may restrict ongoing communication with the general partners to only a few times per year.
But in exchange for these limitations of control, limited partners have limited liability. You can lose only the amount you invest in the fund and no more. If the hedge fund goes belly-up and a landlord comes looking for back rent, he can go after the general partners and their personal assets, but he can’t come to the limited partners and ask them for money.