If you have decided to start a hedge fund, hopefully you have taken some time to consider how you will be compensated for managing the fund and making successful investments.

Following are some of the more common fee structures used by sponsors of hedge funds:

• Management fee: The management fee is commonly charged as a percentage of assets under management, and is usually between 0.5% and 2%. First-time hedge fund managers usually try to minimize or eliminate the management fee in order to align their interests with those of the fund investors.

• Performance fee/carried interest: Hedge fund sponsors often receive a performance fee that is calculated as a percentage of the fund’s profits or gains. This fee can be calculated and paid quarterly or annually. If the fund’s underlying investments are expected to pay significant dividends, then the general partner of the fund may be paid a performance fee at the same time that the dividends are paid. The amount of the performance fee is usually at least 20%, and can be greater if no management fee (or a low management fee) is charged. The performance fee is usually paid as a “carried interest” in the fund, which permits the general partner to pay capital gains tax rates on the carried interest, rather than at ordinary income rates.

Note that the ability to charge a performance fee depends on the state in which the general partner is located, if your hedge fund has less than $150 million in assets under management. For funds smaller than this amount, it may not be permissible to charge a performance fee to investors that are not considered “qualified clients” under SEC standards. There may be workarounds for this, depending on the state in which you are located.

There are many important legal issues to be considered when forming a hedge fund, including the fee structure. If you are ready to form your hedge fund, contact Whitley LLP Attorneys at Law today. We can help you navigate the complex legal issues involved and help your fund get off to a successful start.