Why do hedge funds use two LLCs?
Beginners · Video 2 of 12 · 1:15 ·
A fund usually has two companies. The Fund LLC holds investors' money, is offered under an SEC exemption, and passes gains through to each investor for tax. A Manager LLC, owned by the manager, runs the fund, so a claim about how the fund is run generally stops at that company instead of reaching the manager personally. Each new fund gets its own pair.
Everything here is for educational purposes only and is not legal, tax or investment advice, or an offer to buy or sell any security. Laws and thresholds change and depend on your facts, so talk to a qualified attorney before acting.
Key facts
- Money in your personal account is mixed with yours, so your creditors can reach it.
- The Fund LLC is owned by investors; each pays tax on their own share.
- The Manager LLC runs the fund and collects the management fee and performance allocation.
- A claim about how the fund is run generally stops at the Manager LLC.
- Each fund gets its own Fund LLC and Manager LLC, so a claim in one fund doesn't reach the other.
- Fraud or your own wrongdoing still reaches you, and companies must be kept truly separate.
Transcript
Founder: My friends want me to manage their money.
Operator: Love it. Simplest version: they wire you the money, and you trade it.
Founder: Easy.
Operator: Until you get sued, or go broke. Their money's mixed in with yours, so your creditors can reach it.
Founder: Anything else?
Operator: Pooling their money means selling a security, so the SEC gets involved. And the IRS taxes every gain as yours.
Founder: Not great.
Operator: So it goes into its own company, the Fund LLC, offered under an SEC exemption. Investors own it, and each pays tax on their share.
Founder: And I run it?
Operator: Then a claim about how the fund is run is aimed at you personally.
Founder: I'd rather it wasn't.
Operator: So you put a Manager LLC in between. You own it, it runs the fund, and a claim generally stops there.
Founder: Now my partner wants in.
Operator: Then you both own the Manager LLC, say 60 to 40. It collects the fees, often 2% a year, plus often 20% of new profits.
Founder: And my second fund? Same manager?
Operator: Then a claim in Fund Two lands on the company running Fund One. So each fund gets its own pair. And partners can split each one differently, like 30 to 70.
Founder: So now I'm bulletproof.
Operator: Not quite. Fraud or your own wrongdoing still reaches you. And keep each company truly separate, with its own bank account, or a court can ignore the shield.
Founder: Wait. Let me start over.