When a hedge fund is created by people in the United States, then it is known as a domestic partnership of a hedge fund. This hedge fund structure allows for a limited partnership, in which someone invests money and is therefore buying an interest in the partnership, becoming a limited partner. A hedge fund manager who oversees a domestic partnership will often times create a separate entity. This entity service is tasked with giving advice to the partnership members in order to help limit the amount of personal liability. The separately created entity will be considered a general partner in the partnership on its own.
The state where the general partner of the domestic partnership of a hedge fund has its offices setup, the laws of the state will determine if the hedge fund manager will set up the general partner as a limited partnership, a corporation or a limited liability company. On occasion, depending on the circumstances, the hedge fund manager will set up two entities, one set up as the general partner and one set up as a management company. It should be noted however, that a hedge fund manager will not be exempt from personal liability in cases of fraud and abuses that fall under federal law just because they set up an entity as a management company or general partner.
Most of the time, a domestic partnership of a hedge fund will be set up as a limited liability company, usually for tax purposes only. This allows the hedge fund to have many limited partners and one general partner, and usually they have no one who is directly employed by them. A fund that is set up in this manner will get its money invested by the lone general partner and all of the limited partners.
When setting up an entity as a general partner, this does not necessarily have to be an individual person. In fact, it is usually another business entity. A business entity that is set up as the general partner would be structured as an "S" corporation or an "LLC". This allows the individual limited partners to be protected from unlimited liability, whereas the general partner is not protected from this and is actually exposed to such liability. When a domestic partnership of a hedge fund is managed by a general partner, it then must hire a management company, which makes all of the important investment decisions. Many times, the general partner and management company are one in the same, thus resulting in what is known as a nested structure.
