US Domestic Hedge Funds
U.S. Domestic Hedge Funds: Structure, Strategy & Key Considerations
For aspiring fund managers and seasoned traders alike, launching a U.S.-based hedge fund can be a strategic pathway to managing capital, executing high-conviction strategies, and attracting sophisticated investors. But understanding the legal structure, investment flexibility, and regulatory environment is essential before taking the first step.
At SCG Fund Services, we assist investment professionals with forming domestic hedge funds—typically structured as limited partnerships (LPs) or limited liability companies (LLCs)—to operate within U.S. jurisdiction while maintaining compliance with SEC guidelines and offering flexibility in trading strategies.
What Is a Hedge Fund?
A hedge fund is a private investment vehicle designed for accredited investors and institutional clients. Unlike mutual funds, hedge funds are not publicly marketed and do not accept capital from the general public. This distinction allows hedge fund managers greater flexibility in strategy and structure.
Key features of hedge funds include:
- Open strategy mandate: Use of long and short positions, derivatives, leverage, arbitrage, and other advanced strategies
- Performance-based compensation: Managers earn a share of fund profits (typically 20%–30%) through an incentive allocation
- Capital preservation focus: Managers often invest their own capital and are motivated by results, not just asset growth
- Limited investor base: Restricted to accredited investors and subject to private offering rules under Regulation D
By contrast, mutual funds are publicly offered, strictly regulated, and limited in terms of risk exposure (e.g., no short selling, restricted derivatives use). Hedge funds, on the other hand, are nimble, performance-driven vehicles designed for alpha generation.
Domestic Hedge Fund Structures
In the U.S., most hedge funds are structured as:
- Limited Partnerships (LPs) – Where the general partner (the manager) oversees fund operations and strategy, while limited partners (investors) provide capital.
- Limited Liability Companies (LLCs) – Popular for offering operational flexibility and pass-through tax treatment for U.S.-based investors.
Managers typically establish a management company to operate the fund and charge two types of fees:
- Management Fee: Typically 1%–2% of assets under management (AUM), covering operational costs
- Performance Fee (Incentive Allocation): Typically 20%–30% of annual profits, aligning manager and investor interests
Hedge vs. “Hedged” Fund: A Historical Perspective
The term “hedge fund” dates back to the 1940s, when Alfred Winslow Jones pioneered the use of long/short equity strategies to hedge market risk. A true hedge fund actively manages risk exposure by “hedging”—taking offsetting positions to reduce volatility and preserve capital.
Today, however, the term is often used loosely. Not all funds labeled as hedge funds use hedging strategies. In reality, many employ long-only equity strategies, functioning more like private mutual funds with higher fees and fewer protections. A genuine hedge fund deploys hedging, arbitrage, and diversified strategies—not just leverage.
Offshore vs. Domestic Hedge Funds
While this page focuses on U.S. domestic hedge funds, it’s important to understand how offshore hedge funds compare:
Domestic Hedge Fund | Offshore Hedge Fund |
|---|---|
Structured as LP or LLC in the U.S. | Structured as corporations or SPCs in jurisdictions like the Cayman Islands or BVI |
Suitable for U.S. taxable investors | Suitable for non-U.S. investors and U.S. tax-exempt entities |
Subject to U.S. regulations (e.g., SEC, CFTC) | Subject to local offshore regulations |
Managers often registered with the SEC or state regulator | Management entities may be offshore or affiliated with U.S. firms |
K-1 tax reporting for U.S. investors | Often provides privacy and confidentiality for international investors |
Is a Domestic Hedge Fund Right for You?
If your target investor base includes U.S. taxable investors, and you plan to operate from within the United States, a domestic hedge fund may be your most appropriate vehicle. It’s especially suitable for:
- Long/short equity strategies
- Event-driven or relative value trading
- Credit, arbitrage, or volatility-focused portfolios
- Emerging managers targeting U.S.-based family offices and HNWIs
However, if you aim to serve offshore investors or maintain investor anonymity, you may benefit from exploring an offshore or master-feeder fund structure.
Launch Your Domestic Hedge Fund with SCG
SCG Fund Services has helped emerging and established fund managers launch hedge funds since 2005. We assist with:
- Fund entity formation (LP or LLC)
- Drafting offering documents (PPM, LPA, Subscription Agreements)
- SEC Form D filings and compliance
- Selection of fund administrators, auditors, and service providers
- Structuring advice based on fund strategy and investor profile
