Overview of hedge fund tax structures

Abstract

Purpose

The purpose of this paper is to provide a brief overview of some common hedge fund structures and some of the tax considerations that are significant in choosing among these structures.

Design/methodology/approach

The focus of this article is US federal income tax considerations, particularly in the circumstance where the fund manager includes, at least in part, persons who are US individual taxpayers. The structures described here, including limited partnerships organized under US law, offshore investment companies, and master‐feeder structures, serve as basic building blocks for many other variations that may be appropriate, depending on a number of factors, including investment objectives (e.g. capital appreciation versus dividend income), anticipated investors (e.g. non‐US investors and investors subject to special regulatory regimes) and the composition of the investment managers (e.g. managers that include both US and non‐US principals).

Findings

Hedge funds must be structured carefully to avoid unfavorable US tax consequences and each structure has both advantages and disadvantages.

Originality/value

An essential summary of tax structures for hedge fund managers and advisers.

Citation

Zarin, R.S. and Zimmerman, W.P. (2006), "Overview of hedge fund tax structures", Journal of Investment Compliance, Vol. 7 No. 1, pp. 55-59. https://doi.org/10.1108/15285810610701618