Legally speaking, there is no exact definitive answer to what is a hedge fund and there is confusion where hedge funds fall under what regulatory bodies’ supervision. A hedge fund is merely a vehicle for holding and investing the funds of its investors and is therefore not a genuine business in the normal sense of the word business. The specific structure of a hedge fund is usually determined by its domicile (place of its registration) and type of business organization it adopts. Most hedge funds are limited partnerships or organized as corporate entities; some are like mutual funds. Hedge funds prefer if there are no regulations at all since they will not have to file certain regulatory or statutory reports which might inadvertently divulge some trade secrets that could be copied or imitated by its competitors.
Most hedge fund managers are located on-shore where they maintain their offices and also hire employees. Majority of them are located in the United States, especially in the East Coast areas of New York City and the Stamford and Greenwich counties of the state of Connecticut. Next in number of managers is London, which is expected since it is Europe’s leading financial centre and where most hedge funds pitch their expertise to raise investors’ interest and also new investment capital. Australia is the centre for Asia-Pacific funds with Hong Kong close behind. Most of the hedge funds however, are registered in off-shore tax havens such as the Cayman Islands, the British Virgin Islands, Dublin (Ireland), Bermuda and Luxembourg. These areas offer excellent professional services such as accounting, legal, and back-room operational services together with a business-friendly regulatory environment and extremely favourable tax considerations. Because hedge funds are alternative investments and not offered to the general public, they are considered private in nature and operate under two major exemptions: firstly, as funds with fewer than a 100 investors or partners and secondly, as funds whose number of investors can exceed a 100 as along as they are “qualified purchasers”. Both types of funds are allowed to charge performance or incentive fees. The idea is to give hedge fund managers the maximum freedom and flexibility to do what they think is the best investment strategy, limited only by the risk tolerance of their investors as contained in private contracts between them. For the investors, participation in the fund is the presumption that they are sophisticated enough and also wealthy enough (being qualified purchasers or accredited investors) to absorb probable losses.
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