General partner (GP)

A general partner in a limited partnership has two key characteristics: broad authority to manage the partnership and unlimited liability for the partnership's debts and obligations. This combination creates both significant power and substantial risk for whoever serves in this role.

Limited partnerships have become the most popular structure for domestic hedge funds. Investors are familiar with this legal form, and Delaware has developed extensive case law that provides clear guidance for how these entities operate. This legal certainty makes limited partnerships attractive to both fund managers and investors.

The unlimited liability aspect of being a general partner creates serious risks. If the partnership faces financial trouble or legal claims, creditors can go after the general partner's personal assets to satisfy debts. To protect against this exposure, most hedge fund managers do not serve as general partners directly.

Instead, they create a separate entity—usually a limited liability company (LLC)—to serve as the general partner. The fund manager or key personnel own this LLC, but the LLC itself acts as the general partner of the fund. This structure provides important protection because creditors can typically only reach the assets of the LLC, not the personal assets of the LLC's owners.

The LLC serving as general partner usually holds only minimal assets: a small investment in the fund and any that have not yet been distributed. This keeps the potential loss limited if legal or financial problems arise. The broader assets of the —such as office equipment, other funds, and personal wealth of the managers—remain protected.

General partners control both domestic and that use limited partnership structures. In offshore funds organized as limited partnerships, the general partner serves as a partner with authority spelled out in the .

The general partner has legal authority to make all investment and operational decisions for the fund. However, the entity serving as general partner typically does not conduct day-to-day business operations. It has no employees, office leases, research subscriptions, or other regular business activities. Instead, it functions purely as the legal control entity for the fund.

Fund general partners are special-purpose entities created specifically to manage partnership-structured funds. These are typically limited liability companies or limited partnerships with one narrow function: serving as the general partner for a hedge fund.

This specialized role distinguishes the general partner from the management company. The management company serves as the public face of the firm and handles daily operations. It employs staff, signs office leases, owns technology systems, purchases research, holds intellectual property, and enters into investment management agreements with funds. In return, the management company receives from the funds.

The general partner, by contrast, exists solely to provide legal control over the fund and receive performance-based compensation.

Fund general partners receive performance compensation through profit allocations. These may be called performance allocations, , or . Importantly, general partners do not receive management fees or other fixed compensation.

This creates a split in how the hedge fund manager's revenue flows. The management company collects management fees and any fee-based performance compensation. The fund general partner receives allocation-based performance compensation. This separation, known as , provides certain tax advantages compared to having all revenue flow through a single entity.

Organizing as a profit allocation and directing it to the fund general partner can reduce the overall tax burden compared to a simpler structure where the management company receives all payments directly.

Hedge fund managers have flexibility in how they structure their general partner entities. Some firms use one fund general partner to serve all their partnership-structured funds. Others create a separate fund general partner for each individual fund.

The choice between these approaches depends on several factors. Firms consider the number of funds they manage, the complexity of their fee structures, their tax planning objectives, and whether they want additional liability separation between different funds. Some managers prefer separate entities to create cleaner segregation, while others find a single entity more administratively efficient.

While using limited liability entities as fund general partners provides important protection, this protection has limits. Managers should not assume that the corporate structure shields them from all potential liability.

The protection works well for typical business debts and contractual obligations. However, it does not protect against certain types of misconduct. For example, if an individual engages in fraud, creditors may be able to "" and reach personal assets despite the LLC structure.

Additionally, some laws impose on LLC members under specific circumstances. This means that even with the protective structure in place, individual managers may still face personal liability in certain situations involving regulatory violations or other statutory obligations.