Proskauer's Hedge Start: Key Tax Issues

Different hedge fund investors have different tax concerns that must be taken into account when structuring a hedge fund and its portfolio investments. Hedge fund investors generally fall into three categories:

• U.S. taxable investors who 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, since that gives them essentially the same tax treatment as if they owned the underlying assets directly.
• U.S. tax-exempt investors (such as foundations or pension plans) who generally prefer to invest in an offshore fund — most typically a corporation organized in a no-tax jurisdiction such as the Cayman Islands — that is not transparent and is treated as a corporation for U.S. tax purposes.
  • The offshore corporate fund acts a "blocker" that permits a U.S. tax-exempt investor to avoid "unrelated business taxable income" (UBTI) that the tax-exempt