Hedge Fund Legal Structure and its Impact on Performance

Abstract

While there is a plethora of research on investment strategies, asset allocation and risk management, one area where academic research is scarce is the legal structure that a fund employs and the resulting differences in performance and risk. Hedge funds may be set up using a variety of legal structures. Among the more common ones are Open Ended Investment Company, Limited Liability Company, Partnership (3C1), Partnership (3C7) and Corporation. This article bridges the gap by examining performance from the perspective of the legal structure of the hedge fund. Using the Morningstar database, legal structures are examined at the strategy level. A probit model is formulated to examine whether or not performance and level of assets are influenced by the legal structure. The results show that while there are no uniformly significant differences between the performances and assets of funds using various structures certain patterns hold as to the level of assets and legal structures.