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This article contemplates a structure that involves both US and Cayman Islands domiciled eeder fundsand suggests that, because of the enhanced complexity of Cayman Islands companies, it may be a good time to consider structuring a aster feederfund solely using limited partnerships. Furthermore, this article will:A aster feederstructure is used primarily by hedge fund managers to address investor tax and regulatory concerns, some of which are discussed below. In a typical structure, a master fund will be formed in a tax efficient jurisdiction to serve as the primary trading vehicle. Investors invest in the master fund indirectly through a feeder fund that contributes all or substantially all of its assets to the master fund.Potential disadvantages can include the cost of establishing the entire structure, especially in the case of smaller hedge funds seeking a cost efficient structure, as well as the accounting and administrative complexity involved in administering a master fund with multiple feeders.The choice of fund entities and jurisdictions is largely driven by regulatory and tax considerations (and investment managers should consult tax counsel early in the structuring process):US Taxable Investors: Feeder funds established in the United States, or for investors that are already subject to the US federal income tax regime, typically will be established as entities that provide low throughincome tax treatment for US federal income tax purposes. In such case, both the US feeder fund and the master fund will not be subject to US federal income tax and each investor will be allocated its allocable share of the master fund gains, losses, income, deductions and credit. The US feeder fund would typically be structured as a Delaware limited partnership or Delaware limited liability company because each of these entities is treated as a low throughentity for US federal income tax purposes (unless elected otherwise) and Delaware has proven itself to be a stable jurisdiction in which to conduct business.Non US Investors and US Tax Exempt Investors: Non US investors (to the extent they are not already subject to the US tax regime) typically will seek to avoid being subjected to US federal income tax on income that is ffectively connectedwith the conduct of a trade or business in the United States and US tax exempt investors typically will seek to avoid the potential US federal income tax consequences of recognizing nrelated business taxable income Feeder funds offered primarily to these investors typically will be established in a non US jurisdiction as an entity that is taxed (or elects to be taxed) as a corporation for US federal income tax purposes (where limiting the activities of the master fund to alleviate these concerns is not ideal or practical).The Cayman Islands is a popular jurisdiction in which to establish both offshore feeder funds and offshore master funds, in part for a number of reasons:entities formed in the Cayman Islands are generally not subject to Cayman Islands tax;as with Delaware, the Cayman Islands is generally considered to be a stable jurisdiction in which to conduct business and is familiar to both investors and to investment managers; andthe jurisdiction boasts a robust network of service providers thereby facilitating fund establishment, accounting and administration.For these and other reasons, hedge fund managers may prefer to use a Cayman Islands exempted company (which is governed by the Companies Law (2012 revision), a Company) as the offshore feeder fund in a aster feederstructure and a Cayman Islands exempted limited partnership (which is governed by the Exempted Limited Partnership Law (2012 revision), a Partnership) as the master fund. Note that, for offshore funds, some managers may use Companies as master funds and Partnerships as offshore feeder funds. Other offshore entities, such as trusts, are sometimes used but are considered by many to be too expensive or legally rigid.Under US federal income tax law, a Cayman Islands Partnership (as well as many other types of non US entities that are treated as low throughentities for US federal income tax purposes) may file an election with the US Internal Revenue Service (a so called heck the boxelection) electing to be treated as a corporation for US federal income tax purposes. Alternatively, the investment manager may use Cayman Islands Partnerships (with no heck the boxelections) as the offshore master fund and offshore feeder fund and interpose an entity that is treated as a corporation for US federal income tax purposes between the offshore feeder fund and the master fund.The role of Company Directors in a aster feederstructureCompanies are required to have directors (each, a Director) but investment managers, and indeed some Directors, may not understand the various legal obligations and duties associated with the position. An affiliate of the investment manager typically holds the anagement sharesof a Company used in a aster feederstructure; anagement sharesgenerally hold the power to appoint the Directors. Those Directors have a number of statutory duties (maintaining registers, certain reports and books of account, among others) and must approve certain actions taken by the Company. Directors (in their role as Directors) do not manage the business or make investment decisions. This is because, in the context of a Company used in a hedge fund structure, the Company hires the investment manager to run the investment program and, in the management agreement with the investment manager, the Directors delegate to the investment manager all powers permissible under governing law.The legal role of Directors is not ministerial, however, which investment managers should consider when appointing them. Not all Director duties can be delegated to the investment manager and Directors are subject to personal liability for a breach of certain fiduciary duties, which will be discussed below. Cayman Islands case law has established a number of principles relating to Directorsfiduciary duties, perhaps the most pertinent of which is that Directors must act in what they bona fide consider to be the best interests of the Company. the offshore feeder fund, and not to subsidiary or affiliated entities and not necessarily to investors. In the context of a aster feederstructure this means that Directors primarily consider the interests of the offshore feeder fund, when structured as a Company, and not those of the master fund or any other feeder fund. If the aster feederstructure uses a Company for both the offshore feeder fund and the master fund, then the master fund will have Directors whose duties are owed to it and not to the offshore feeder fund. Some fund complexes use the same Directors for the offshore feeder fund and the master fund, which may give rise to irreconcilable conflicts of interest.In the case of hedge funds, Directors are typically one of two types: nsiders(employees of or entities controlled by the investment manager); or professional Directors that are not affiliated with or otherwise employed by the investment manager (Independent Directors). Independent Directors generally either work for a financial services company, which may perform separate administrative services to the fund complex, or work independently.There may be costs involved in employing Directors. Independent Directors, and some insiders, are typically paid a salary for their work that is not tied to the fund investment performance. Directorscompensation and other fees are generally paid out of the assets of the Company itself.Increased demand for the use of Independent DirectorsIn the past it was fairly common for all of the Directors of a Company used in a hedge fund structure to be insiders, which is efficient because they are known to the investment manager and generally share the investment manager views. However, investor demand for Independent Directors has increased since the financial crisis as investors seem to associate them with added security in that an Independent Director may look more carefully into the investment manager business practices than an inside Director.
mulberry daria clutch bag Is it Time to Revisit Your Hedge Fund Structure