Most hedge funds are established as limited partnerships. Investors share in the partnership’s income, expenses, gains and losses; each partner is taxed on its respective share. Key players include:
- Portfolio Manager(s) – Determines strategy and is invested in the fund (compensated based on fund’s annual performance)
- Prime Broker – Funds must secure their loans with collateral to gain margin and secure trades. In turn, each broker (usually a large securities firm) uses its own risk matrix to determine how much to lend to each of its clients, acting as a stand-in regulator.
- Auditors – Ensure fund compliance; verifies financial statements as required by federal law.