How to Start a Hedge Fund in Delaware

Updated on Friday 29th October 2021

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American hedge funds are typically registered in Delaware, a jurisdiction that offers numerous tax advantages for the investors who are interested in how to start a fund. A hedge fund registered in Delaware, United States of America (USA) generally refers to private investment companies which can benefit from specific incorporation exemptions applicable under the Securities Act 1933 and the Investment Company Act 1940

How to register a Delaware hedge fund 

Investors who are interested in incorporating a hedge fund startup in Delaware will need to register two legal entities. One of the business forms refers to the hedge fund itself, while the other one is created for the investment manager of the hedge fund. Delaware is the main location in the USA where hedge fund startups can be registered, as the jurisdiction offers legislation favorable to the business environment. 
As a general rule, the hedge funds in Delaware, USA are registered under one of the following business forms: the limited partnership or the limited liability corporation (LLC). When incorporating a hedge fund in Delaware, the investors will need to register the legal entity with the Internal Revenue Service (IRS).

At the same time, it is necessary to apply for a Federal Employer Identification Number, a procedure that can be completed on the IRS’ website. It is important to know that the registration procedure can be completed in a short period of time. The procedure on how to start an investment fund in Delaware registered as a hedge fund states that the investors will need to draw the company’s articles of association and other compulsory documents. 

The main features of a Delaware hedge fund

Thanks to the fact that the legislation at different levels of the United States is the same, the creation of hedge funds is possible in various jurisdictions. However, Delaware remains an all-time favorite among local and foreign investors coming to the US.

Those who want to set up hedge funds must know that these are characterized by the following:
  1. they can be used to market financial instruments on local and foreign markets, which is why they are so popular at worldwide level;
  2. even if they are considered as high-risk funds, they are known for the important returns investors can obtain;
  3. they are available for professional and accredited investors, which is why they are safe;
  4. they are subject to less stringent requirements from a regulatory point of view;
  5. they are easier to establish compared to other types of investment funds.

If you decide on Delaware and setting up a hedge fund here, we have affiliates in the USA who can provide the necessary guidance in meeting all the requirements related to having such an investment vehicle up and running in the shortest time possible.

Investment strategies proprietary to hedge funds in Delaware

One of the most important reasons to create a hedge fund in Delaware is that it can employ various investment strategies for its investors. Among these, such a fund can use:
  • general trading strategies which rely on the predictions of the financial market;
  • selective trading which relies on short-term investments on stocks with high predictability;
  • low price purchases and sales, which implies taking more risks;
  • long-pull selection strategies which need long periods of time for the investments to develop.

Hedge funds can be created by local and foreign investors interested in accessing one of the most important financial markets in the world, the US one.

Why start a Delaware hedge fund through an LLC? 

As mentioned above, a hedge fund startup in Delaware can be set up as a partnership or as an LLC. Although the latter represents a newer business structure in Delaware (introduced in 1991), this legal entity became very popular amongst the investors wishing to start a commercial business, but also for those interested in opening an investment fund

The LLC became an attractive business structure due to a set of reasons which refer to the liability of the investors, as well as to the freedoms they can assume within the fund. When opening a hedge fund startup in Delaware through an LLC, the company’s founders will have the quality of members. The members of the company are also its owners, but the advantage is that they will not be held liable for their personal assets for the debts of their company. 

When registering an LLC in Delaware, the company is formed through an operating agreement, a founding document that provides great flexibility to its members. This refers to the liberties they have in terms of the structure of the company’s management. Through this structure, the managers of the hedge fund startup will also benefit from more advantageous conditions. 

Qualifying a hedge fund in Delaware 

Another option related to the incorporation of a hedge fund in Delaware refers to qualifying the respective investment company in this jurisdiction. This option is available for a hedge fund that has already been incorporated in another state and the investors are interested in performing investment activities in Delaware

Foreign funds qualifying in this situation will only refer to the registration with the competent authorities, which will issue a certificate that will state the investment fund has the right of performing investments in Delaware. At the same time, the certification will also refer to the fact that the fund is registered for tax purposes in this jurisdiction. 

What is the procedure for qualifying a hedge fund on foreign markets? 

The procedure on how to start an investment fund in Delaware which develops investment activities on foreign markets is known as foreign qualifying. This is applicable when the hedge fund is registered in Delaware, but the fund’s manager develops his or her activities in a foreign country. Simply put to words, the procedure refers to the registration of the Delaware hedge fund in the jurisdiction where the manager is a resident. 

In this case, the foreign manager is legally required to obtain a certification that will allow him or her to carry out the business activities developed through the Delaware fund in another country. Once the fund was registered in both jurisdictions, it is necessary to know that it will be liable to taxation in both states, following the legislation on the matter applicable in each jurisdiction where the fund operates.

Also, the fund will need to follow the reporting requirements that are imposed in each state and pay the necessary fees requested by each local institution. According to the legislation in Delaware, the fund might need to be registered for foreign qualifying if it has employees or owners residing in other states, which means that the entity should be registered in more than one foreign country. 

It is necessary to mention that the procedure of foreign qualifying does not impose high fees, and it is a required procedure for funds that are created to develop investment activities in other countries. Provided that the fund’s representatives fail to obtain their certification, a set of punitive measures can be imposed. 

For example, the fund can lose the right of bringing a claim in front of a court, but it is necessary to know that in this situation, the vehicle can regain this right, after concluding the certification procedure, even at a delayed period of time. It is advisable to obtain the certification in due time, as the investment fund can be imposed with a set of fines and additional taxes.  

The statutory trust in Delaware

One of the main ways of creating a hedge fund in Delaware is by using a statutory trust for its registration. Its main advantages are related to the flexibility it offers from a governance point of view, as well as the fact that it does not need to hold an annual shareholders' meeting.

Delaware is the main destination for the creation of hedge funds, and some of them use apart from trusts, limited partnerships, and limited liability companies (LLCs). The last two vehicles’ main advantages reside in the fact that the liability of the participants is limited to the amounts of money they pool in the fund. Also, such funds can appoint a manager through a separate agreement through which the administrator has extensive authority.

Such structures also rely on master-feeder and parallel funds.

If you are interested in a hedge fund startup, we have affiliates in various countries and they can help you with the creation of various structures through which you can manage such a structure.

Master-feeder and parallel funds in Delaware

It is common for hedge funds in Delaware to take the form of master-feeder and parallel funds which are created as partnerships between US and foreign entities where both legal members are treated the same way from a taxation point of view. However, the US entity will be treated as a partnership from a taxation perspective, while the foreign ones will be treated as a corporation.

Also, the foreign feeder can be set up in a jurisdiction that provides other tax benefits (usually, offshore countries are preferred).

The main advantage of the master-feeder is that the manager can administer one asset pool where all the investments of participants are gathered.

When it comes to the parallel fund, the manager who must be based in Delaware will administer both the US and foreign entities participating in the fund.

Our magazine also covers the establishment of cryptocurrency hedge funds which are quite sought by young investors. We have partners in several countries where virtual tokens are accepted as trading instruments, so if you want to set up such a fund, you can read more about them in our articles.


Why open an investment fund in Delaware? 

There are a set of solid reasons for investing in Delaware. One of the main reasons is that the state benefits from a court that handle cases deriving from corporate legislation in a fast manner; this is completed through the Court of Chancery. It is necessary to know that Delaware benefits from legislation in the business field that has been constantly adapted to the needs of the market for more than 100 years. Other reasons for investing in this region are presented below: 
  • Delaware does not apply a set of taxes, such as income tax, sales tax, or property tax;
  • when starting an investment fund in Delaware through an LLC, it is necessary to know that the founders benefit from a high level of privacy, as the data on the wealth of the investors is very well secured here; 
  • however, information concerning the wealth of a person or of a legal entity (or investment fund) has to be known in accurate details by the country’s financial and tax institutions;
  • it is allowed to start an LLC as a single investor, regardless of the nationality of the person;
  • businessmen wishing to start a hedge fund startup in Delaware through an LLC benefit from very low incorporation costs, as the registration of an LLC, the top preference when investing here, costs approximately $250; 
  • also, this business form does not require any minimum share capital during its incorporation.  

The investment funds market in the USA

The financial sector is one of the most important parts of the US economy, and one of its main divisions is the investment funds market. According to statistics:
  • at the level of 2017, there were 7,965 investment funds on the US market;
  • in 2018, their number increased to 8,093;
  • in 2019, the number dropped to 7,943, while in 2020, there were 7,636 due to the effects of the Covid-19 pandemic.

Most of these were mutual funds which are quite appreciated on the US market. However, if you want to set up a hedge fund in Delaware, you can rely on our local affiliates.
Investors interested in how to start a fund in Delaware should know that the company’s employees will also need to be registered for taxation in this country. Businessmen are invited to contact our team of affiliates in Delaware for more details on the registration of a hedge fund. Those interested in how to start a hedge fund in Delaware can receive in-depth assistance on the taxation of this type of investment company.