On Hedge Fund Structures: Improving Allocation
Models for Illiquid Investments

Abstract

In the 2000s large investment banks and hedge funds became a major source of capital for start up firms and private equity deals. However, the standard hedge fund structure led to the largest bankruptcy rate in investment banks since the Great Depression. The hedge funds that were involved in the private equity business have also had trouble due to the lack of leverage capital resulting in multiple prime brokers that provided the leverage becoming insolvent. The hedge funds have also had net redemptions as investors try to redeem their shares in the fund. Many funds are currently invoking a clause in the fund documents that limits the amount of net redemptions. The authors review the standard hedge fund structure, then modify it utilizing a side pockets.