Taxation of hedge funds—what is a hedge fund?
Produced in partnership with James McCredie and Alicia Thomas of Macfarlanes LLP
Taxation of hedge funds—what is a hedge fund?

The following Tax guidance note Produced in partnership with James McCredie and Alicia Thomas of Macfarlanes LLP provides comprehensive and up to date legal information covering:

  • Taxation of hedge funds—what is a hedge fund?
  • Open-ended structure
  • Seeking a total return for investors
  • Opportunistic investment strategies generally
  • The use of short positions
  • The use of leverage
  • A fixed management and variable annual performance fee
  • Tax aspects underpinning hedge fund structure

Although there is no specific definition of the term ‘hedge fund’, there are a number of characteristics that might typically cause a fund to be classified as a hedge fund as opposed to any other sort of investment fund.

This Practice Note provides an overview of some of the key features of a hedge fund, which are helpful to bear in mind when it comes to structuring and considering the tax consequences for such a fund.

In essence, most hedge funds will have all (or most) of the following characteristics:

  1. open-ended collective investment vehicle

  2. seeking a total return for investors

  3. generally opportunistic

  4. taking ‘short’ positions

  5. maximising leverage (ie borrowing), and

  6. fee structure comprising:

    1. a fixed management fee, and

    2. a variable annual performance fee

This Practice Note explores these characteristics in turn.

The UK tax regime applying to hedge funds is explored in the following Practice Notes:

  1. Taxation of hedge funds—structure of the hedge fund vehicle

  2. Taxation of hedge funds—trading in the UK and the investment manager exemption (IME)

  3. Management structure of hedge funds

  4. Other issues in hedge funds

This Practice Note together with those listed above concentrate on the nature and structure of a hedge fund from a UK centric point of view. In particular, it has been assumed that the key individuals involved with the setting up and running of the fund (or at least