Preface xiii Chapter 1 The Arcane World of Hedge Funds and Investment Partnerships 1 What Is a "Hedge Fund"? 1 U.S. Venture Partnerships 3 Types of U.S. Hedge Fund Entities and the U.S. Tax Code 4 Organizing a Typical U.S.

Hedge Fund 6 Investor Clienteles in Hedge Funds 10 Foreign Investors in a U.S. Hedge Fund 14 Offshore Funds 14 U.S. Investors in Offshore Funds 17 U.S. Investors in Swiss Bank Accounts 19 U.S.

Investors in Madoff-Like Managed U.S. Trading Accounts 23 Size of the Global Hedge Fund Industry 25 Fund-of-Funds 28 Incentives of the Hedge Fund Manager and Investors 30 Valuation of a Hedge Fund Management Company 31 Economies of Scale in Hedge Funds 33 Chapter 2 The Structure of Hedge Funds 35 Organizing a Typical Offshore Hedge Fund 35 Master-Feeder Structuring of Onshore/Offshore Arms: Organizing a Hedge Fund for Clienteles 39 U.S. Withholding Agent for U.S. Withholding Taxes on Foreign Investors 44 Chapter 3 Hedge Fund Fees 47 Starting Point: The Partnership Agreement 47 Fund Valuation at Discrete Opening Time Points 48 Calculation of Fixed Fees 49 Calculation of Performance Fees 55 Claw-Back Provision: Performance Fee Returned to Limited Partners 66 Representation of a Fund''s Net Asset Value (NAV) per Share 71 Black-Scholes Formula Valuation of Performance Fees 74 Chapter 4 Hedge Fund Accounting and Tax Filing 79 Partnership Accounting for U.S.

Funds 79 IRS Tax Return Filings for U.S. Hedge Funds 80 Financial Statements for Hedge Funds and Venture Funds 85 Interim Valuation: The Core of a Hedge Fund''s Accounting Operation 93 Books of Account and Financial Statements for Hedge Funds 96 Audit of an Offshore Fund 97 Audit of a U.S. Fund 98 Capital Account Audit for Both Offshore and U.S. Funds 99 Chapter 5 Partner Tax Allocations in U.S.

Partnerships 101 U.S. Tax Allocation Rules Governing U.S. Partnerships 101 Tax Components of U.S. Investment Partnership Income 103 Fixed Fees: Income to the General Partner and Expense to the Limited Partners 107 Generalizing the Allocation Formula to Other Components of Income 108 Tax Basis of Partner''s Investment in a U.S.

Partnership 109 Accountants'' Terminology 113 Tax Allocations of Realized and Unrealized Income to Partners 113 The Tax Allocation Method of Layering 115 Tax Allocation of Interest 118 Tax-Exempt Interest Income, Line 18a 120 Similar Calculation for Tax Allocation of Dividends, Investment Expense, Foreign Tax Paid 121 Tax Allocation of Fixed Fees Paid by Limited Partners 121 Tax Allocation of Guaranteed Payments (of Fixed Fees) to the General Partner 122 Reporting Subcomponents of Interest Income and Dividends 122 Tax Consequences of Shorting 123 Short Positions: Tax Treatment of Equity Dividends or Bond Coupons Claimed as Interest Expense 123 Distributions from Partnerships Owned 124 Chapter 6 Tax Allocations of Realized Gains by Layering 127 Tax Allocation of Unrealized and Realized Capital Gains Using the Method of Layering 127 Ignoring Ambiguity #1 with Layering 132 Work-Around to Fix Ambiguity #2, the Fatal Flaw with Layering 133 Chapter 7 Partial and Full Netting Methods 137 The Methods of Aggregation or Netting 137 Partial Netting 138 Full Netting 141 Measures of Book-Tax Disparity across Partners 142 Formulating the Problem for Optimal Partner Tax Allocations under Full Netting 143 Formulating the Problem for Optimal Partner Tax Allocations under Partial Netting 146 Solving the Convex Optimization Problem of Tax Allocation 148 Chapter 8 Comparative Tax Consequences of Layering and Netting Methods 153 Which Is the Better Method for Allocation of Realized Gains: Layering, Full Netting, or Partial Netting? 153 Layering Examples Showing Earlier Tax Payment 154 Full Netting Examples Showing Tax Postponement 158 Chapter 9 Tax Efficiency of Hedge Funds 161 Tax Efficiency Considerations for Offshore Hedge Funds 161 Tax Preference Ordering for U.S. Investors 163 More Attractive Tax Items to U.S. Investors 167 Less Attractive Tax Items to U.S. Investors 169 An Exception: Special Tax Preference for Gains from U.S.

Exchange-Traded Futures Contracts 170 Ambiguities in Tax Preference 170 Tax Efficiency Steps for U.S. Hedge Funds 170 A Structure for Tax-Exempt U.S. Entities to Recover Foreign Taxes 173 Chapter 10 Hedge Fund Performance and Risk Presentation 175 Performance Presentation: CFA Institute GIPS Verification 175 Calculation of Hedge Fund Returns for Performance Presentation 179 Facilitating Historical Risk and Return Review for Investors Using GIPS Guidelines 183 Chapter 11 Mutual Funds and Venture Funds Compared to Hedge Funds 191 Tax Return Filing of U.S. Partnerships Is an Involved Task 191 Comparison with Tax Allocations Made by Mutual Funds 191 U.S.

Venture Partnerships (Silicon Valley Venture Funds) 196 Chapter 12 Epilogue 203 Economic Accounting Is a Common Denominator for U.S. and Offshore Funds 203 Tax Return Filing of U.S. Partnerships Is an Involved Task 204 Calculating Partner Allocations Is Most of a U.S. Partnership''s Tax Accounting Effort 204 Layering and Netting Methodologies for Tax Allocation of Capital Gains 205 Example of Tax Allocation of Capital Gains by Full and Partial Netting in a 100-Partner Setting 205 Tilting Tax Allocations According to Tax Preferences 206 The Crown Jewel: Automated Tax Allocation of All Items of Income 206 The End of an Era of Layering 207 Appendix 1 Excerpts of Key U.S.

Statutes Discussed in Chapter 1 That Govern U.S. and Offshore Hedge Funds Venture Funds 209 Appendix 2 Methodology and Implementation Example of Full Netting 229 Appendix 3 Methodology and Implementation Example of Partial Netting 253 Appendix 4 Nonabusive Tilting of Tax Allocations According to Tax Preferences 259 Appendix 5 Eliminating Layering Entirely, by Allocating Dividends, Interest, Capital Gains, and Expenses in One Step 267 Index 277.