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Abstract: 

Domestic hedge funds are traditionally set up as flow-through entities, partnerships or LLCs. This structure insures that profits are only taxed at the level of the investor, rather than potentially twice, as would happen if a fund were a corporation. But a flow-through entity paying high fees to its investment manager can inadvertently force its investors to pay tax on more income than they actually earn. This article will review why this issue is topical at this time and will analyze possible solutions, including characterization of fees, mutual funds, insurance wrap-vehicles, offshore funds and derivative contracts. No solution can be said to be perfect, but most address one or another of the aspects of the problem.

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Affiliations:  1: Twenty-First Securities.