Proskauer's Hedge Start: Key Structuring Issues

A key initial decision for a manager launching a new hedge fund is to decide between:

• A "master-feeder" fund structure: In a typical "master-feeder" structure, an onshore "feeder" fund and an offshore "feeder" fund both co-invest through a single jointly owned "master" fund, or
• "parallel" fund structure: In a "parallel" fund structure, the manager manages two separate accounts, an onshore fund and an offshore fund.

Key Tax Considerations

The need for two funds, one onshore and one offshore, is generally driven by U.S. tax considerations:

• U.S. taxable investors generally prefer to invest in an onshore fund (typically a Delaware limited partnership or limited liability company) that is treated as a partnership for U.S. tax purposes.
  • U.S. taxable investors in a partnership generally receive the same tax treatment as if they owned the underlying assets directly.