Legally, hedge funds are usually set up as Limited Liability Corporations (LLCs), or as Offshore Corporations.
Hedge funds are usually labeled as “onshore” (domestic U.S.) or “offshore”.
The onshore fund is for U.S. investors, who must face tax consequences. To avoid these consequences, non-U.S. investors often opt for the offshore fund, which is domiciled outside the U.S. (e.g., Bermuda, Cayman Islands, etc.).
A manager will often run the same strategy in both an onshore and an offshore fund, so both U.S. and non-U.S. citizens may take advantage of it.
A hedge fund should fully disclose its operations, people and methods in its Private Placement Memorandum (PPM), or Offering Document. The PPM explains the fund strategy, risks, fees, restrictions, etc. It is not the official legal document; that is called the Partnership Agreement (or the Articles of Incorporation if it is an offshore fund).
The Subscription Agreement requires signatures of the investor and the fund’s general partner, and usually includes a questionnaire to determine whether the investor and the fund are suited for each other.
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