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Hedge Fund Structure

Hedge Funds

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Hedge Fund Structure is comprised of various titles and roles for employees and investors. These title and operational deviations are required to ensure the fund’s legal and investment function. Hedge Fund structure divides into many roles: General Partner, Limited Partner, Portfolio Manager, Analyst, Trader, and Consultant.

Hedge funds are always limited liability partnerships. This allows funds to avoid substantial regulations typically required by the Securities and Exchange Commission. The status of partners within the hedge fund determines their responsibilities and abilities. They come in two flavors, general partner and limited partner.

General Partners

General partners are the highest rank within the hedge fund structure. This rank consists of the founding fund managers. General partners set the fund’s investment strategy. They are responsible for all results and punishments that arise as a result of their chosen strategy, both legally and financially. They pay the firm’s fees, choose its employees, pay its salaries, and take on its liabilities. As a result, they are the ones responsible in civic and criminal law for debts or schemes operated by the fund.

Limited partners

Limited partners are outside investors. These investors purchase their way into the fund. They pay fees and charges for entering the fund, and rely on the investment skill of the general partners to earn profit from the fund. These partners can’t set the investment’s direction, demand purchase of assets, or reject specific investments made by the general partner’s staff. They can only vote on policy by adding or removing their money from the fund. In exchange for this lack of control, they have no civil or criminal liability for the fund’s deeds. Limited partner’s personal holdings (outside of the fund) cannot be charged for fund’s debts or legal liabilities.

As already stated, general partners set firm strategy. Individual portfolio managers actually control operations based on that strategy. This group makes the majority of individual investment decisions. They instruct analysts and traders based on the mandates given to them by general partners, and relay advice to those partners based on results.

Analysts

A fund’s analysts hunt, research, and inspect prospective investment instruments and vehicles. They take an economic and fundamental stance on these investments and decide whether or not strategies should be pursued. Their viewpoints on economic and corporate trends are related to portfolio managers, who use this information to direct traders and advise general partners.

Traders

Traders actually buy or sell investments based on incoming news, events, and analyst expectations. Traders have some autonomy, but their long term directions are set in place by portfolio managers. They ultimately have the most direct connection to hedge fund gains or losses, but the responsibility stops at the general partner.

Consultants

Consultants come in a wide array of potential roles. They can be legal, regional, geographic, economic, corporate, industrial, or political. Whatever advice is needed on specific issues or concerns, consultants who have the necessary knowledge are brought in to advise the fund at cost. Depending on the quality of their advice, they are retained or released.

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