Handbook of Hedge Funds

4

Operational and Organizational Structures

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From a functional perspective, hedge funds are very similar to traditional investment companies. Both are separate collective investment schemes that issue shares to investors and manage pools of securities on their behalf. The primary differences are to be found on the organizational and legal sides. Mutual funds tend to be simple onshore organizations, while hedge funds need to be set up using complex onshore and offshore structures.

Ten years ago, a stand-alone hedge fund manager could open shop in relative obscurity with minimal cost and little or no infrastructure. He could operate with no internal or external control, and still have investors flocking to invest. This is less and less the case. Regulators have turned the spotlight on to the hedge fund industry and hedge fund investors are doing more and more organizational and structural due diligence. Hedge fund managers can no longer hope to operate purely as traders and outsource everything. They need to care about the quality of their organization, and so do their investors. In this chapter, our goal is therefore to “open the black box” and start looking at the different components that form the operational engine of a hedge fund.

4.1 LEGAL STRUCTURES FOR STAND-ALONE FUNDS

In essence a stand-alone hedge fund – or more generally an alternative investment fund – is an unregulated ...