Hedge Fund - Hedge Fund Structure

Hedge Fund Structure

A hedge fund is usually a company or partnership set up solely to make investments, and has no employees and no assets other than its investments. The portfolio is managed by the investment manager, a separate entity that employs the people who manage the portfolio and which is the actual hedge fund business.

As well as the investment manager, the other functions of a hedge fund are delegated to a number of other service providers. The most common service providers are:

Prime broker: prime brokerage services include lending money, acting as counterparty to derivative contracts, lending securities for the purpose of short selling, trade execution, clearing and settlement. Most prime brokers also provide custody services for the fund's assets. Prime brokers are typically parts of large investment banks.

Administrator: the administrator typically deals with subscriptions and withdrawals by investors and the formal calculation of the value of the assets, and performs related back office functions. In some funds, particularly in the US, some of these functions are performed by the investment manager, a practice that gives rise to a potential conflict of interest inherent in having the investment manager both determine the NAV and benefit from its increase through performance fees. Outside of the US, regulations often require this role to be taken by a third party.

Distributor: the distributor is responsible for marketing the fund to potential investors. Frequently, this role is taken by the investment manager.