Most U.S.-domiciled hedge funds are organized as partnerships for tax purposes, which gives them flexibility in structuring the economic terms of investments in a fund, including through the allocation of gains and losses. Fund income, expenses, gains and losses are allocated to investors periodically and passed through to them annually on Schedule K-1 of the fund’s partnership tax return. Those allocations and contributions of property to, and distributions of property from, partnerships have important tax ramifications for fund investors. Against this backdrop, three presentations during the 15th Annual Effective Hedge Fund Tax Practices seminar, co-hosted by Financial Research Associates and the Hedge Fund Business Operations Association, covered the fundamentals of the tax treatment of partnership contributions and distributions, special rules on deductibility of fund expenses and the allocation of fund gains and losses, as well as how those items will be reflected on the Form K-1 delivered by a fund to its investors. See “What Critical Issues Must Hedge Fund Managers Understand to Inform Their Preparation of Schedules K-1 for Distribution to Their Investors?
,” Hedge Fund Law Report, Vol. 6, No. 11 (Mar. 14, 2013). This article summarizes the key lessons from those three presentations.