Structuring a Hedge Fund and Fund Management Company: The Legal Issues – Part Two

In part one we explored the common fund structures for those aiming to attract US investors, In part two, we look at funds aimed at European investors, as well as how best to structure a fund management company.

Onshore European structures

For fund managers looking to target European investors, going down the onshore regulated route can definitely cause its fair share of headaches. Setting up this type of structure requires a great deal of care in order to avoid serious regulation issues. Potentially, regulators can intervene and tell you to do things differently.

This type of interference could be an issue that lasts a day, or could drag on for months – costing you money into the bargain. However, this onshore regulated route does have one advantage, in that it can definitely benefit managers in terms of raising capital.

For managers targeting European investment, the most common fund structures are the Irish Qualifying Investor Fund (QIF) and Luxembourg Specialised Investment Fund (SIF). In broad terms, these do not offer as high a level of flexibility as a Cayman fund structure, but they are both more flexible than UCITS (Undertakings For The Collective Investment Of Transferable Securities – A public limited company that coordinates the distribution and management of unit trusts amongst countries within the European Union).

Structuring a fund management company

Without a doubt, this is the least glamorous part of setting up a hedge fund. This is the elbow grease required to get the whole thing in motion, and while it may involve a lot of paperwork it is essential to get things right here.

Getting the fund management entity properly established is vital. You want to have a strong, stable, management structure in place that is equipped to run smoothly and allow full focus. Putting in place a clear partnership agreement will help the fund to steer clear of reputation-threatening disagreements and highly costly disputes further down the line.

At this stage, it’s worth reminding yourself that the vast majority of hedge fund disputes typically arise within the management structure – not within the fund.

While it can be easy to get side tracked by the fund, managers need to place just as much emphasis on the management structure itself. The partnership agreement has to be watertight.

Limited Liability Partnership (LLP)


This is the most common type of vehicle that is started up by UK fund managers. An LLP is, basically, a tax-transparent corporate entity. Setting your management structure up in this way helps to avoid double taxation. This way incentive and management fees go straight to the partners as if they were earning them themselves (and not the fund).

In addition, the fact that they are partners in the firm, and not employees, means they are classed as self-employed and therefore save National Insurance costs.

The LLP structure provides a further benefit in terms of equity. As people are not holding shares in the company, the LLP structure avoids the complicated tax issues that surround ‘employment-related securities’, making it far easier to move equity within the limited company, and giving greater flexibility.

Other articles in this series: