Side-by-side structure

In a side-by-side structure, an investment manager creates both a domestic hedge fund Domestic fund A domestic fund is a hedge fund organized under U.S. law—typically as a Delaware limited partnership or limited liability company—that serves as the primary investment structure for U.S. taxable investors. and an offshore hedge fund Offshore fund An offshore fund is a hedge fund established outside the United States, typically in low-tax jurisdictions like the Cayman Islands or British Virgin Islands. These funds primarily serve non-U.S. investors and U.S. tax-exempt organizations by offering tax advantages and greater regulatory flexibility than domestic fund structures. . These funds operate at the same time as separate legal entities. Each fund maintains its own investment portfolio, but the same investment team manages both funds.

This setup allows different types of investors to participate in the same investment strategies. Each fund maintains a legal structure that fits the specific needs of its investor group.

A side-by-side structure offers several clear advantages compared to other fund setups. Since the funds maintain separate investment portfolios instead of pooling money through a single master fund, the investment manager has more flexibility in how each fund operates.

This flexibility allows the manager to use different investment approaches for each fund. For example, the manager might hold positions longer in the domestic fund. This longer holding period helps U.S. taxable investors qualify for favorable long-term capital gains tax rates. At the same time, the manager might sell similar positions more quickly in the offshore fund, where investors do not receive the same tax benefits.

Side-by-side structures are simpler than master-feeder arrangements Master-feeder structure A master-feeder structure is a fund arrangement where multiple feeder funds (typically designed for different investor types) invest into a single master fund that makes all investments, creating operational efficiency while accommodating diverse investor needs. in several ways. The structure eliminates the need to establish and maintain a master fund, along with the intermediate funds and subsidiary entities that master-feeder structures require. This reduces both initial setup costs and ongoing operational expenses.

The administrative work is also lighter. Master-feeder arrangements require the master fund to track each individual investor across multiple feeder funds Feeder fund A feeder fund is a type of investment fund that collects money from investors and then invests nearly all of that money into a larger "master fund." This structure allows different types of investors—such as U.S. taxpayers, tax-exempt organizations, and foreign investors—to all participate in the same investment strategy while using the fund structure that works best for their specific tax and regulatory needs. . The master fund must also carefully allocate gains and losses to maintain accurate accounting for each investor at each fund level. Side-by-side structures avoid these complex allocation requirements entirely. This streamlined approach reduces administrative work and may reduce the need for specialized fund administration services.

Despite these advantages, side-by-side structures create operational difficulties. The biggest challenge comes from trade execution. When the same investment program operates across two separate funds, the investment manager must either execute identical transactions twice (once for each fund) or allocate individual trades between the funds.

For managers who trade actively, this duplication creates substantial administrative overhead and increases trading costs. These extra costs can become economically disadvantageous over time.

When managers operate side-by-side funds with similar or identical strategies, the funds' performance may diverge over time. This happens particularly when the manager uses different trading approaches for each fund. Performance can also differ when redemptions in one fund force the manager to sell positions that only affect that specific fund.

Beyond performance differences, side-by-side structures prevent asset consolidation. The manager cannot combine assets from both funds to obtain leverage or achieve other efficiency benefits. This inability to aggregate assets means each fund remains smaller individually. Smaller fund sizes limit the manager's ability to secure fund-level leverage and obtain other benefits that are available to larger pools of capital.

As of October 1, 2025, the SEC's updated Form PF Form PF Form PF is a required SEC filing for investment advisers who manage private funds with at least $150 million in assets. The form collects detailed information about how these funds operate, including their use of borrowed money, investor makeup, and investment holdings. This data helps regulators monitor risks that could affect the broader financial system. reporting requirements classified side-by-side structures as "parallel fund structures." This classification required advisers to file separate reports for each component fund rather than combined filings. This change, which the SEC and CFTC adopted in February 2024, substantially increased reporting complexity and compliance obligations for advisers managing multiple funds.

The new requirements particularly affect advisers who manage multiple funds that pursue substantially the same strategies and invest side-by-side in substantially the same positions. Advisers managing side-by-side structures must ensure their compliance systems can handle separate reporting for each fund component.

Side-by-side structures work particularly well with fund-of-funds vehicles because different investor classes have different tax preferences. Taxable U.S. investors typically prefer allocations to underlying hedge funds structured as partnerships for U.S. tax purposes. This partnership structure enables "flow-through" tax treatment, where the fund's gains and losses pass directly to investors for tax purposes.

Offshore investors, by contrast, generally prefer underlying funds organized as corporations for U.S. tax purposes. This corporate structure helps them avoid certain adverse tax classifications under U.S. tax rules.

A fund-of-funds manager can address these competing preferences efficiently through a side-by-side structure. The domestic fund-of-funds and offshore fund-of-funds can maintain separate investment mandates that align with each investor group's tax profile.