GP/LP hedge fund structure

[jawn619]

Why are most funds structured as GP/LP instead of RIA? What are the specific advantages? Lower regulation? Lower transparency? Everyone else is doing it?

[racemize]

I'm not sure I understand your question.  The GP is an RIA in that structure.  It is managing the LP's account.  The difference is managing one account (the LP) vs managing all of the partner's accounts separately.  So the RIA manages one account instead of many.

 

(Note that often times there is a 3 structured system when incentive fees are used, FYI).

[jawn619]

What are the practical advantages/disadvantages of the partnership structure over the SMA structure?

[Travis Wiedower]

1. Investing in some obscure stuff is possible (or at least easier) through one fund.

2. Similarly, there are some fringe cases where normal stocks/options don't work out under the separate account structure. If one of your accounts has only $20k, investing in stocks that are over a couple hundred dollars may not be possible. If a client has $20k and you want to take a 1% position in a $500 stock, well that's not happening.

3. Investing one account is easier than investing more than one account.

[Jurgis]

I believe there was already a long thread about this on CoBF. Search?

 

From client side the advantages/disadvantages are:

 

- Non qualified clients can be in SMA, not sure if you can have hedge fund for non-qualified.

- In SMA client does the taxes, in HF client gets K-1 - both of these have pros/cons from client side

- In SMA client sees all the moves in real-time, in HF they don't and might not know what you hold at all - both of these have pros/cons

- In SMA client can pull money/close account at any time, in HF you can restrict - both of these have pros/cons.

[winjitsu]

If you want to take non-US (institutional) money, the preferred setup will be a Cayman Island master feeder partnership structure so your offshore LPs can avoid paying taxes.

 

We've sat on the sidelines in the past waiting until funds create an offshore entity to invest.