Lesson 5 of 8 · 14 min
Investing directly: partnerships, master-feeders, side letters and SMAs
Most hedge funds are limited partnerships run by a general partner, often wrapped in a tax-efficient master-feeder structure, with terms set by the offering documents and tailored by side letters; large investors can instead get a fund of one or a separately managed account.
In short
- Legal form: a limited partnership or LLC, onshore or in a tax-advantaged offshore location; the manager is the GP (or managing member), investors are LPs.
- The private placement memorandum, partnership agreement or articles set the GP-LP relationship. Funds are usually perpetual entities, but many close and liquidate.
- A master-feeder structure: onshore and offshore feeder funds pool money into one master fund that invests; it is set up for tax efficiency and makes it easier to accept global investors.
- Fees: classic '2 and 20'; newer variants such as '1 or 30' (the greater of 1% of assets or 30% of alpha over a benchmark).
- Side letters give individual investors special legal, tax, regulatory, operational or reporting terms (e.g. extra information rights) without changing the main documents.
- Fund of one and SMA: more control, transparency, liquidity and lower fees for large investors, but more operational complexity, and the manager may be less motivated.
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