Hedge fund formation combines entity law, securities law, adviser regulation, tax, and negotiated economics. A hedge fund is an open-end private fund: investors contribute capital when they subscribe and can withdraw it periodically. This guide covers U.S. hedge funds; private equity and other closed-end drawdown funds work differently and are not covered here. It is written first for the manager of an emerging or small hedge fund, who can use it to identify the questions the fund's documents must answer and then work with fund counsel on the answers for the particular fund. It is written second for a smaller investor who may not have counsel of their own: the same questions show what a hedge fund's documents let the manager charge, change, or withhold, and where an investor's rights depend on a notice period, a vote, or the manager's discretion.
This guide covers the limited partnership agreement: its purpose and parties, performance fees, hurdles and high-water marks, lock-ups and withdrawals, capital accounts, the manager's duties and protections, expenses, side letters, amendment, and dissolution. It is part of the hedge fund formation practice guide, which covers adviser registration, a manager outside the United States, who can be charged a performance fee, Rule 506(b) and Rule 506(c) offerings, Section 3(c)(1) and 3(c)(7) funds, the anti-fraud rules, and Form D; the private placement memorandum has its own guide.
What is the purpose of a hedge fund limited partnership agreement?
A hedge fund limited partnership agreement (LPA) is the contract that sets the fund's key legal terms and mechanics, including how profits are split between the general partner and the investors, what management fees are charged, and when investors may withdraw.
A hedge fund is a type of private fund. A private fund pools money from several investors without registering as an investment company. The SEC's staff describes the role of a limited partnership agreement this way: “if you structure your private fund as a limited partnership, a limited partnership agreement, or LPA, will document the fund’s key legal terms and mechanics.” The Hedge Fund Limited Partnership Agreement is one such agreement for a hedge fund.
Delaware law gives maximum effect to freedom of contract, so the terms of a Delaware limited partnership agreement, rather than an assumed industry norm, largely govern the fund. A limited partnership agreement can expand, restrict, or eliminate the partners' duties, but it cannot eliminate the implied covenant of good faith and fair dealing.
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The SEC staff says an LPA documents key fund terms and mechanics.
For example, if you structure your private fund as a limited partnership, a limited partnership agreement, or LPA, will document the fund’s key legal terms and mechanics. This may include how the general partner may call for capital commitments, how profits are split between the general partner and the limited partners, any management fees, and the extent to which limited partners may withdraw from the fund.
See SEC Office of the Advocate for Small Business Capital Formation, “What do I need to know before starting a private fund?”.
The SEC staff describes a private fund as pooled investor money outside investment-company registration.
A private fund is an entity created to pool money from multiple investors that is not required to be registered or regulated as an investment company under the Investment Company Act.
See SEC Office of the Advocate for Small Business Capital Formation, “What do I need to know before starting a private fund?”.
Investor.gov describes hedge funds as investment pools.
Like mutual funds, hedge funds pool investors’ money and invest the money in an effort to make a positive return.
See Investor.gov Glossary: Hedge Funds.
The SEC staff defines a hedge fund as a type of private fund.
A hedge fund is a type of private fund that generally invests in a diverse range of securities and typically has more flexible investment strategies than mutual funds.
See SEC Small Business Glossary.
6 Del. C. § 17-1101(c) states Delaware's policy of giving maximum effect to freedom of contract and to the enforceability of partnership agreements.
It is the policy of this chapter to give maximum effect to the principle of freedom of contract and to the enforceability of partnership agreements.
See 6 Del. C. § 17-1101(c).
6 Del. C. § 17-1101(d) permits the partnership agreement binding the partners to expand, restrict, or eliminate their duties, but not the implied contractual covenant of good faith and fair dealing.
To the extent that, at law or in equity, a partner or other person has duties (including fiduciary duties) to a limited partnership or to another partner or to another person that is a party to or is otherwise bound by a partnership agreement, the partner’s or other person’s duties may be expanded or restricted or eliminated by provisions in the partnership agreement; provided that the partnership agreement may not eliminate the implied contractual covenant of good faith and fair dealing.
See 6 Del. C. § 17-1101(d).
Who are the parties to a hedge fund limited partnership agreement?
A hedge fund limited partnership agreement binds the fund's general partner, which manages the fund, and its limited partners, the investors who commit capital to it.
The SEC staff’s glossary describes a general partner as the person or entity that raises money and manages a limited partnership fund. It says, “A limited partner is an investor who commits capital to a private fund.” Delaware law permits classes of limited partners with different rights.
The SEC’s staff says a fund may have a separate adviser. An investment management agreement often governs the adviser’s responsibilities.
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The SEC staff describes the limited partner and its LPA relationship.
A limited partner is an investor who commits capital to a private fund. Unlike a general partner, a limited partner’s participation in the fund’s investment activities is restricted, and its personal liability for fund debt is limited to the amount of money that the limited partner contributed or committed to contribute. The relationship of a limited partner with the fund and the general partner is governed by a Limited Partnership Agreement.
See SEC Small Business Glossary.
The SEC staff describes the general partner of a private fund.
A general partner is an individual or an entity—typically affiliated with a venture capital firm, private equity firm, or other investment firm—that raises money from limited partners for a private fund organized as a limited partnership and that both invests in and manages the fund.
See SEC Small Business Glossary.
6 Del. C. § 17-302(a) permits a partnership agreement to create classes or groups of limited partners with the relative rights, powers, and duties the agreement provides.
A partnership agreement may provide for classes or groups of limited partners having such relative rights, powers and duties as the partnership agreement may provide, and may make provision for the future creation in the manner provided in the partnership agreement of additional classes or groups of limited partners having such relative rights, powers and duties as may from time to time be established, including rights, powers and duties senior to existing classes and groups of limited partners.
See 6 Del. C. § 17-302(a).
The SEC staff says a fund may have a separate adviser.
The fund may have a separate investment adviser that provides investment advice.
See SEC Office of the Advocate for Small Business Capital Formation, “What do I need to know before starting a private fund?”.
The SEC staff says an investment management agreement often governs adviser responsibilities.
Documentation often includes an investment management agreement governing the responsibilities of the investment adviser.
See SEC Office of the Advocate for Small Business Capital Formation, “What do I need to know before starting a private fund?”.
What should a hedge fund agreement say about performance fees?
A hedge fund agreement states the performance fee, which a limited partnership agreement filed with the SEC for Third Point Enhanced sets at 20 percent of each investor's net increase after the management fee and any loss-recovery balance, reallocated to the general partner.
The SEC's glossary gives the plain meaning: “Performance fees are compensation provided to an adviser based on the performance of a client’s portfolio.” A limited partnership can take the fee as a performance allocation, meaning a share of each investor's gains moves from that investor's capital account to the general partner. The gains measured can include both realized gains, on investments the fund has sold, and unrealized gains, on investments it still holds, as a limited partnership agreement filed with the SEC for The Lion Fund II provides.
Investor.gov, the SEC's investor-education site, describes typical hedge-fund terms: “In addition, they also typically pay a performance fee of 15-20% of the hedge fund’s profit subject to certain measures, such as a high-water mark and a hurdle rate, which can limit when a manager is entitled to performance fees.”
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The filed Third Point Enhanced agreement reallocates 20 percent of the defined net increase after deducting the management fee and loss-recovery balance.
Subject to Section 4.1.2.3 and Section 4.1.2.7, at the end of each Fiscal Year of the Partnership, twenty percent (20%) of the result of (x) the Net Increase, if any, allocated to a Limited Partner’s Capital Account for such Fiscal Year, minus (y) the Management Fee debited from such Capital Account for such Fiscal Year, minus (z) such Partner’s Loss Recovery Account balance for such Fiscal Year, shall be reallocated to the General Partner (the “Incentive Allocation”).
See Third Point Enhanced LP, Am. & Restated Exempted Ltd. P'ship Agreement § 4.1.2.2 (dated July 31, 2018), filed as Exhibit 10.33.
Investor.gov describes typical performance fees, high-water marks, and hurdles.
In addition, they also typically pay a performance fee of 15-20% of the hedge fund’s profit subject to certain measures, such as a high-water mark and a hurdle rate, which can limit when a manager is entitled to performance fees.
See Investor.gov: Hedge Funds.
The filed Lion Fund II agreement counts realized and unrealized profits and losses on all securities positions in its net profits and net losses.
“Net Profits” and “Net Losses” of the Fund shall include realized and unrealized profits and losses with respect to all securities positions.
See The Lion Fund II, L.P., Second Am. & Restated P'ship Agreement § 1.20(a) (dated May 26, 2021), filed as Exhibit 10.1 to Biglari Holdings Inc. Form 8-K.
The SEC staff's glossary defines performance fees as adviser compensation based on the performance of a client's portfolio.
Performance fees are compensation provided to an adviser based on the performance of a client’s portfolio.
See SEC Small Business Glossary, Performance Fees (SEC staff resource).
What should a hedge fund agreement say about hurdles and high-water marks?
A hedge fund agreement states whether the performance fee applies only to gains above a hurdle rate and whether a high-water mark or loss carryforward requires earlier losses to be recovered before a new fee is charged.
A hurdle is a minimum return the investor keeps before the manager shares in gains. A high-water mark, or loss carryforward, means the manager takes no new performance fee until the investor's earlier losses are made up. Investor.gov explains why both matter to an investor: they “can limit when a manager is entitled to performance fees”.
Limited partnership agreements filed with the SEC use both tools in different forms. The Lion Fund II agreement charges 25 percent of the increase that exceeds a hurdle rate, subject to a loss carryforward. The Third Point Enhanced agreement subtracts the investor's loss recovery account balance before calculating its 20 percent allocation.
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The filed Lion Fund II agreement uses a 25 percent incentive reallocation of its defined increase in net asset value.
As of the end of each calendar year, with respect to each Limited Partner other than The Lion Fund, L.P., an Incentive Reallocation in an amount equal to 25% of the Net Increase in Net Asset Value, calculated with respect to each Capital Contribution by such Limited Partner, that exceeds the Hurdle Rate with respect to such Capital Contribution and subject to the “Loss Carryforward” (as defined below) is debited from such Limited Partner's Adjusted Capital and Capital Accounts and credited to the Adjusted Capital and Capital Accounts of the General Partner.
See The Lion Fund II, L.P., Second Am. & Restated P'ship Agreement § 5.02(A) (dated May 26, 2021), filed as Exhibit 10.1 to Biglari Holdings Inc. Form 8-K.
The filed Third Point Enhanced agreement reallocates 20 percent of the defined net increase after deducting the management fee and loss-recovery balance.
Subject to Section 4.1.2.3 and Section 4.1.2.7, at the end of each Fiscal Year of the Partnership, twenty percent (20%) of the result of (x) the Net Increase, if any, allocated to a Limited Partner’s Capital Account for such Fiscal Year, minus (y) the Management Fee debited from such Capital Account for such Fiscal Year, minus (z) such Partner’s Loss Recovery Account balance for such Fiscal Year, shall be reallocated to the General Partner (the “Incentive Allocation”).
See Third Point Enhanced LP, Am. & Restated Exempted Ltd. P'ship Agreement § 4.1.2.2 (dated July 31, 2018), filed as Exhibit 10.33.
Investor.gov describes typical performance fees, high-water marks, and hurdles.
In addition, they also typically pay a performance fee of 15-20% of the hedge fund’s profit subject to certain measures, such as a high-water mark and a hurdle rate, which can limit when a manager is entitled to performance fees.
See Investor.gov: Hedge Funds.
What should a hedge fund agreement say about lock-ups and withdrawals?
A hedge fund agreement states when an investor may first withdraw, how much notice a withdrawal needs, and when the general partner may cap or pause withdrawals.
A lock-up delays the first date on which an investor may withdraw. A notice period sets how far ahead a withdrawal request must arrive. A gate caps the total withdrawals the fund pays for a period. A suspension pauses withdrawals in stated circumstances, such as a market closure. Investor.gov describes the usual picture for hedge funds: “Hedge funds typically limit opportunities to redeem, or cash in, your shares to four times a year or fewer.”
Limited partnership agreements filed with the SEC show a wide descriptive range. One bars withdrawals until the second anniversary of each investment, and another lets the general partner cap aggregate withdrawals in a calendar month at 10 percent of net asset value. Delaware law separately prohibits a distribution that would make the limited partnership insolvent, meaning that its liabilities, other than what it owes partners for their partnership interests, would exceed the fair value of its assets. That limit is section 17-607(a) of the Delaware Revised Uniform Limited Partnership Act, and it applies whatever the agreement's withdrawal terms say.
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The filed Stilwell agreement restricts withdrawals until the second anniversary of the date the investment was accepted.
Except as otherwise provided in this Agreement, Limited Partners will not be permitted to withdraw any investment until the expiration of the second anniversary of the date such investment was accepted into the Partnership.
See Stilwell Value Partners I, L.P., Am. & Restated Ltd. P'ship Agreement § 6.3(b) (dated Oct. 1, 2008), filed as Exhibit 10.56.
The filed Solasglas agreement requires at least three business days' written notice for the withdrawal right it describes.
If a Limited Partner wishes to withdraw funds, it must give written notice to the General Partner at least 3 Business Days prior to the proposed withdrawal date indicating the amount to be withdrawn from such Limited Partner’s Capital Account in such notice.
See Solasglas Investments, LP, Third Am. & Restated Exempted Ltd. P'ship Agreement § 5.2(b) (dated May 1, 2026), filed as Exhibit 10.1 to Greenlight Capital Re, Ltd.
The filed Apollo IG Core Replacement agreement lets the general partner limit aggregate withdrawals in any calendar month to 10 percent of the partnership's net asset value.
In addition, aggregate withdrawals during any calendar month shall be limited, at the General Partner’s discretion, to 10% (or such higher percentage as the General Partner determines in its sole discretion) of the Net Asset Value attributable to the Partnership as of the last day of the calendar month (the “10% Threshold”); provided that the General Partner, in its sole discretion, may elect to apply the 10% Threshold on an aggregated basis with respect to the Partnership and any corresponding series or class of interests in any Parallel Fund, which series or class of interests is established to facilitate participation by investors on a side-by-side and pro rata basis in the same Investments with the Partnership.
See Apollo IG Core Replacement, L.P., Second Am. & Restated Agreement of Ltd. P'ship § 6.02(b) (dated June 30, 2026), filed as Exhibit 3.1.
The filed Apollo IG Core Replacement agreement lets the general partner suspend withdrawal rights, in whole or in part, during specified market closures and restrictions.
The General Partner, in its sole discretion, may suspend withdrawal rights, Quarterly Distributions and/or the determination of the Net Asset Value of each Limited Partner’s Capital Account(s), in whole or in part: (i) during any period in which any stock exchange or over-the-counter market on which a substantial portion of the Partnership’s Investments are quoted, traded or dealt in is closed, other than for ordinary holidays and weekends, or during periods in which dealings are restricted or suspended;
See Apollo IG Core Replacement, L.P., Second Am. & Restated Agreement of Ltd. P'ship § 6.07(b) (dated June 30, 2026), filed as Exhibit 3.1.
Investor.gov describes redemption frequency, lock-ups, and suspensions.
Hedge funds typically limit opportunities to redeem, or cash in, your shares to four times a year or fewer. They also often impose a lock-up period of one year or more, during which you cannot cash in your shares. Furthermore, hedge funds may charge you a redemption fee before you are allowed to cash in your shares. Hedge funds may also have authority to suspend redemptions under certain circumstances, including in times of market distress or when their investments are not able to be quickly or easily liquidated.
See Investor.gov: Hedge Funds.
6 Del. C. § 17-607(a) prohibits a limited partnership distribution that would leave specified liabilities exceeding the fair value of partnership assets.
A limited partnership shall not make a distribution to a partner to the extent that at the time of the distribution, after giving effect to the distribution, all liabilities of the limited partnership, other than liabilities to partners on account of their partnership interests and liabilities for which the recourse of creditors is limited to specified property of the limited partnership, exceed the fair value of the assets of the limited partnership
See 6 Del. C. § 17-607(a).
What should a hedge fund agreement say about capital accounts, side pockets, and new issues?
A hedge fund agreement keeps a capital account for each partner that records the partner's share of the fund's net profit or loss, and it says how side-pocket investments and initial public offering shares, called new issues, are kept apart from the main portfolio.
A capital account is a running balance for one partner. An amount credited to the account is added to that balance, and an amount debited is subtracted. The SEC's glossary explains how gains are shared: “Investors generally share in the profits and losses in proportion to their interest in the fund.” The profit and loss can include unrealized gains and losses on investments the fund still holds, as a limited partnership agreement filed with the SEC for The Lion Fund II provides. A performance allocation then moves a share of a partner's gains from that partner's capital account to the general partner.
A side pocket holds an investment apart from the rest of the portfolio. One limited partnership agreement filed with the SEC creates a separate sub-account for each partner that participates in an investment designated for that treatment. New issues are shares sold in an initial public offering. FINRA Rule 5130 generally bars a broker-dealer from selling new issues to an account in which a restricted person has a beneficial interest. Limited partnership agreements filed with the SEC respond by allocating new-issue profits and losses only as FINRA's rules permit.
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The filed Third Point Enhanced agreement allocates net increase to each limited partner's capital account, debits the management fee from it, and reallocates 20 percent of the resulting amount to the general partner.
Subject to Section 4.1.2.3 and Section 4.1.2.7, at the end of each Fiscal Year of the Partnership, twenty percent (20%) of the result of (x) the Net Increase, if any, allocated to a Limited Partner’s Capital Account for such Fiscal Year, minus (y) the Management Fee debited from such Capital Account for such Fiscal Year, minus (z) such Partner’s Loss Recovery Account balance for such Fiscal Year, shall be reallocated to the General Partner (the “Incentive Allocation”).
See Third Point Enhanced LP, Am. & Restated Exempted Ltd. P'ship Agreement § 4.1.2.2 (dated July 31, 2018), filed as Exhibit 10.33.
The filed Solasglas agreement requires a sub-account for each partner that participates in an investment designated a Designated Security.
Whenever the Partnership makes an investment that is in a Designated Security or whenever an existing investment is first designated as a Designated Security by the General Partner, the Partnership shall establish a Sub-Account with respect to each Partner that participates in such Designated Security to reflect such Partner’s Capital Account’s pro rata share of all allocations and distributions attributable to transactions involving such Designated Security.
See Solasglas Investments, LP, Third Am. & Restated Exempted Ltd. P'ship Agreement § 3.5(b) (dated May 1, 2026), filed as Exhibit 10.1 to Greenlight Capital Re, Ltd.
Financial Industry Regulatory Authority Rule 5130 generally prohibits the sale of a new issue to an account in which a restricted person has a beneficial interest, subject to the rule's exceptions.
A member or a person associated with a member may not sell, or cause to be sold, a new issue to any account in which a restricted person has a beneficial interest, except as otherwise permitted herein.
See FINRA Rule 5130(a)(1).
The SEC staff says pooled-vehicle investors generally share profits and losses in proportion to their interests.
A pooled investment vehicle is an entity—often referred to as a fund—that an adviser creates to pool money from multiple investors. Each investor makes an investment in the fund by purchasing an interest in the fund entity, and the adviser uses that money to make investments on behalf of the fund. Investors generally share in the profits and losses in proportion to their interest in the fund.
See SEC Small Business Glossary.
The filed Lion Fund II agreement uses a 25 percent incentive reallocation of its defined increase in net asset value.
As of the end of each calendar year, with respect to each Limited Partner other than The Lion Fund, L.P., an Incentive Reallocation in an amount equal to 25% of the Net Increase in Net Asset Value, calculated with respect to each Capital Contribution by such Limited Partner, that exceeds the Hurdle Rate with respect to such Capital Contribution and subject to the “Loss Carryforward” (as defined below) is debited from such Limited Partner's Adjusted Capital and Capital Accounts and credited to the Adjusted Capital and Capital Accounts of the General Partner.
See The Lion Fund II, L.P., Second Am. & Restated P'ship Agreement § 5.02(A) (dated May 26, 2021), filed as Exhibit 10.1 to Biglari Holdings Inc. Form 8-K.
Investor.gov advises examination of valuation and independent sources.
Hedge funds may hold investments that are difficult to sell and may be difficult to value. You should understand how a hedge fund determines the value of its holdings and the extent to which a fund’s holdings are valued by independent sources.
See Investor.gov: Hedge Funds.
The filed Lion Fund II agreement allocates new-issue profits and losses in a manner permitted under Financial Industry Regulatory Authority rules.
In the event that the Fund invests in securities that are considered to be "New Issues", as that term is defined in the Rules of the Financial Industry Regulatory Authority, Inc., as may be amended from time to time (the "FINRA Rules"), the General Partner shall be permitted to take all such actions as it deems are necessary to ensure that the profits and losses from New Issues are allocated among the Partners in a manner permitted under the FINRA Rules.
See The Lion Fund II, L.P., Second Am. & Restated P'ship Agreement § 5.06 (dated May 26, 2021), filed as Exhibit 10.1 to Biglari Holdings Inc. Form 8-K.
The filed Lion Fund II agreement counts realized and unrealized profits and losses on all securities positions in its net profits and net losses.
“Net Profits” and “Net Losses” of the Fund shall include realized and unrealized profits and losses with respect to all securities positions.
See The Lion Fund II, L.P., Second Am. & Restated P'ship Agreement § 1.20(a) (dated May 26, 2021), filed as Exhibit 10.1 to Biglari Holdings Inc. Form 8-K.
The filed Solasglas agreement does not allocate new-issue items to restricted capital accounts except to the extent permitted by Financial Industry Regulatory Authority rules.
Notwithstanding the provisions of Section 3.4 above, to enable the Partnership to invest in New Issues, the Partnership shall not allocate any items of income, gain, loss, deduction and credit that relate to investments in New Issues to Restricted Capital Accounts except to the extent permitted by the FINRA Rules, and shall instead allocate such items among the other Capital Accounts on a pro rata basis.
See Solasglas Investments, LP, Third Am. & Restated Exempted Ltd. P'ship Agreement § 3.5(a) (dated May 1, 2026), filed as Exhibit 10.1 to Greenlight Capital Re, Ltd.
What should a hedge fund agreement say about duties, exculpation, and indemnification?
A hedge fund agreement states the manager's duties, when exculpation excuses the manager from paying damages, and which claims the fund pays through indemnification, within Delaware's limits on modifying duties and liability.
Investor.gov states the baseline: “Hedge funds . . . are subject to the same prohibitions against fraud as are other market participants, and their managers owe a fiduciary duty to the funds that they manage.” Delaware's partnership statute separately addresses the duties owed under Delaware law: a partnership agreement can expand, restrict, or eliminate them, but it cannot eliminate the implied covenant of good faith and fair dealing. Delaware also preserves liability for bad-faith violations of that covenant.
Exculpation addresses damages owed by a covered person; indemnification addresses covered claims or costs paid by the fund. A Carlyle LPA filed with the SEC defines disabling conduct to include fraud, bad faith, willful misconduct, gross negligence, and willful material breach. That list illustrates one sponsor’s choice.
Sources for this answer
6 Del. C. § 17-1101(d) permits a partnership agreement to expand, restrict, or eliminate duties, including fiduciary duties, but states that it may not eliminate the implied contractual covenant of good faith and fair dealing.
To the extent that, at law or in equity, a partner or other person has duties (including fiduciary duties) to a limited partnership or to another partner or to another person that is a party to or is otherwise bound by a partnership agreement, the partner’s or other person’s duties may be expanded or restricted or eliminated by provisions in the partnership agreement; provided that the partnership agreement may not eliminate the implied contractual covenant of good faith and fair dealing.
See 6 Del. C. § 17-1101(d).
6 Del. C. § 17-1101(f) permits a partnership agreement to limit or eliminate liabilities for breach of contract and breach of duties, but not liability for a bad-faith violation of the implied contractual covenant of good faith and fair dealing.
A partnership agreement may provide for the limitation or elimination of any and all liabilities for breach of contract and breach of duties (including fiduciary duties) of a partner or other person to a limited partnership or to another partner or to an other person that is a party to or is otherwise bound by a partnership agreement; provided, that a partnership agreement may not limit or eliminate liability for any act or omission that constitutes a bad faith violation of the implied contractual covenant of good faith and fair dealing.
See 6 Del. C. § 17-1101(f).
Investor.gov says hedge-fund managers owe a fiduciary duty to their funds.
Hedge funds, however, are subject to the same prohibitions against fraud as are other market participants, and their managers owe a fiduciary duty to the funds that they manage.
See Investor.gov Glossary: Hedge Funds.
The filed Carlyle agreement defines disabling conduct to include fraud, bad faith, willful misconduct, gross negligence, and a willful and material breach of the agreement.
Except as otherwise provided in the Act, the General Partner shall be subject to all of the liabilities of a partner in a partnership without limited partners to (i) Persons other than the Fund and the Shareholders and (ii) subject to the other provisions of this Agreement, the Fund and the Shareholders; provided that to the fullest extent permitted by law, none of the General Partner, the Investment Advisor, their Affiliates (but excluding any Parallel Fund), members, shareholders, stockholders, unitholders or partners (in each case in their respective capacities as such), officers, directors, employees, Carlyle Operating Executives, advisors, the Directors, the Partnership Representative, the Designated Individual and any other Person who serves at the request of the General Partner on behalf of the Fund as an officer, director, partner, member, senior advisor, operating executive, similar consultant or employee of or advisor to any other entity (each, an “Indemnified Party”), shall be liable to the Fund or to any Shareholder for (i) any act performed or omission made by such Indemnified Party in connection with the conduct of the business and affairs of the Fund or otherwise in connection with this Agreement or the matters contemplated herein, unless such act or omission resulted from “Disabling Conduct,” which shall mean fraud, bad faith, willful misconduct, gross negligence, a willful and material breach of this Agreement or the Advisory Agreement by such Indemnified Party or (ii) any mistake, negligence, dishonesty or bad faith of any broker or other agent of the Fund unless such Indemnified Party was responsible for the selection or monitoring of such broker or agent and acted in such capacity with gross negligence.
See Carlyle Private Equity Partners Fund, L.P., Am. & Restated Ltd. P'ship Agreement § 4.2(a) (dated Oct. 1, 2025), filed as Exhibit 3.1.
What should a hedge fund agreement say about expenses, valuation, and reporting?
A hedge fund agreement identifies which expenses the fund pays and any cap on them, who values the portfolio, and which financial reports investors receive.
Limited partnership agreements filed with the SEC show an expense cap using manager reimbursement above 1.75% of average net assets and another limiting expenses to 1.25% of net assets subject to exclusions. The SEC’s examination staff observed advisers charging funds for expenses their agreements did not permit. The staff also observed valuations contrary to disclosed methods and sometimes resulting in fee overcharges.
ILPA, an association of institutional investors, describes organizational expenses as legal, administrative, and compliance costs of private equity fund formation historically borne by limited partners. As an investor-side recommendation for private equity, ILPA proposes a cap at the lower of five basis points of target assets under management or $10 million. That proposal is not a legal requirement or a claim about market practice.
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The filed Third Point Enhanced agreement requires reimbursement when specified operational expenses exceed 1.75 percent of average net assets for a fiscal year.
Notwithstanding anything herein, unless otherwise approved in writing by the Board, to the extent the aggregate amount of the Expenses payable by the Partnership for any Fiscal Year (which, for purposes of this Section 8.2(b), Expenses shall exclude, (A) any Expenses incurred pursuant to Section 8.2(a)(vii) and Section 8.2(a)(xvii), (B) use of “soft dollars,” (C) any indemnification payments made pursuant to Section 6.5 and that may be covered under Section 8.2(a)(viii) and (D) the Management Fee) exceed the product of (x) 0.0175 and (y) the average Net Assets (calculated as the average Net Assets as of each calendar month end) for such Fiscal Year, then the Investment Manager shall reimburse the amount of such excess to the Partnership.
See Third Point Enhanced LP, Am. & Restated Exempted Ltd. P'ship Agreement § 8.2(b) (dated July 31, 2018), filed as Exhibit 10.33.
The filed Solasglas agreement requires the general partner to value, or have valued, the partnership's securities and other assets as of the end of each fiscal period and on other dates it selects.
The General Partner shall value or have valued the Securities and other Assets of the Partnership as of the close of business on the last day of each Fiscal Period and on any other date selected by the General Partner.
See Solasglas Investments, LP, Third Am. & Restated Exempted Ltd. P'ship Agreement § 7.2(a) (dated May 1, 2026), filed as Exhibit 10.1 to Greenlight Capital Re, Ltd.
The filed Apollo IG Core Replacement agreement requires quarterly performance information, portfolio valuation information, and net asset value and capital account statements for limited partners.
The Partnership shall also provide periodic unaudited performance information, no less frequently than quarterly, to the Limited Partners, including (i) a report and summary of the Investments of the Partnership, (ii) portfolio valuation information and (iii) a statement of the Net Asset Value of the Partnership and a statement of the Capital Account balance of each Limited Partner, as of the last calendar day of such quarter.
See Apollo IG Core Replacement, L.P., Second Am. & Restated Agreement of Ltd. P'ship § 9.03 (dated June 30, 2026), filed as Exhibit 3.1.
The filed Endowment master agreement requires fee waiver and expense reimbursement to limit total partnership expenses to 1.25 percent of net assets, subject to stated exclusions.
The Partnership shall not enter into an Investment Advisory Agreement with any Adviser unless such Adviser, pursuant to such Investment Advisory Agreement or otherwise, agrees to waive and/or reimburse the Partnership for its Management Fee and, to the extent necessary, reimburse the Master Fund for expenses incurred, solely to the extent necessary to limit the total expenses of the Partnership in each Fiscal Year to an amount equal to 1.25% of the Partnership’s Net Assets, excluding fees and expenses directly charged by underlying investment funds and underlying investment fund managers, borrowing and other trading and execution costs and fees, taxes, litigation and indemnification expenses, judgments and other extraordinary expenses not incurred in the ordinary course of the Partnership’s business (“Excluded Expenses”).
See The Endowment PMF Master Fund, L.P., Am. & Restated Agreement of Ltd. P'ship § 3.11(b) (dated Feb. 18, 2014), filed as Exhibit 99.A.1.
SEC examination staff observed expenses contrary to fund agreements.
Advisers charged private fund clients for expenses that were not permitted by the relevant fund operating agreements, such as adviser-related expenses like salaries of adviser personnel, compliance, regulatory filings, and office expenses, thereby causing investors to overpay expenses.
See SEC Office of Compliance Inspections and Examinations, Risk Alert: Observations from Examinations of Investment Advisers Managing Private Funds (June 23, 2020).
SEC examination staff observed valuation contrary to disclosures and consequent overcharges.
Valuation. The staff observed private fund advisers that did not value client assets in accordance with their valuation processes or in accordance with disclosures to clients (such as that the assets would be valued in accordance with GAAP). In some cases, the staff observed that this failure to value a private fund’s holdings in accordance with the disclosed valuation process led to overcharging management fees and carried interest because such fees were based on inappropriately overvalued holdings.
See SEC Office of Compliance Inspections and Examinations, Risk Alert: Observations from Examinations of Investment Advisers Managing Private Funds (June 23, 2020).
ILPA describes organizational expenses as fund-formation legal, administrative, and compliance costs historically borne by limited partners.
However, the rapid growth and maturation of the PE space have also created inherent structural challenges in the form of spiraling organizational expenses—the legal, administrative, and compliance costs incurred during the formation of a new investment fund—costs that have historically been borne by LPs alone.
See Institutional Limited Partners Association, The Alignment Gap: Rethinking Costs in Private Equity Fund Formation (May 2026).
ILPA recommends a private equity formation-cost cap at the lower of five basis points or $10 million.
To meaningfully constrain cost overruns, organizational expenses to be borne solely by LPs should be capped at the lower of 5 basis points of a fund’s target assets under management (AUM) or $10 million in total.
See Institutional Limited Partners Association, The Alignment Gap: Rethinking Costs in Private Equity Fund Formation (May 2026).
What should a side letter to a hedge fund limited partnership agreement say?
A side letter to a hedge fund limited partnership agreement is a separate agreement giving one investor rights that other investors do not receive, and limited partnership agreements filed with the SEC expressly permit them.
A well-known, uncontroversial model is the National Venture Capital Association's Management Rights Letter, which a venture fund asks each portfolio company to sign to build its case for an exemption from the ERISA plan-asset rules. The example shows why a side letter can be a benign tool. The right it grants serves one investor's own regulatory position rather than improving that investor's economics. Under the Labor Department's plan-asset regulation, a venture capital operating company must hold investments that carry management rights, which the regulation defines this way: “The term ‘management rights’ means contractual rights directly between the investor and an operating company to substantially participate in, or substantially influence the conduct of, the management of the operating company.”
Limited partnership agreements filed with the SEC expressly let the general partner enter into separate agreements with particular limited partners, including agreements that alter or supplement the main agreement's terms for that partner. Disclosure is the check on side letters. The SEC's examination staff reported advisers that gave select investors side letters with preferential liquidity terms without adequately disclosing them, so other investors were unaware of the potential harm.
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The NVCA explains why a venture fund seeks portfolio-company management rights letters.
In order to build a case for an exemption from the ERISA Plan asset rules, a venture fund will generally ask each of its portfolio companies to sign a management rights letter in connection with the fund’s initial investment. An example of such a letter follows.
See National Venture Capital Association, 2020 Management Rights Letter.
The filed Third Point Enhanced agreement contemplates side letters that modify the agreement and give an investor special or more favorable rights.
“Other Agreements” shall mean side letters or similar separate written agreements, the provisions of which may modify the terms of this Agreement, including any agreement with a Limited Partner that provides for special or more favorable rights.
See Third Point Enhanced LP, Am. & Restated Exempted Ltd. P'ship Agreement § 1.52 (dated July 31, 2018), filed as Exhibit 10.33.
The Labor Department regulation defines management rights.
The term “management rights” means contractual rights directly between the investor and an operating company to substantially participate in, or substantially influence the conduct of, the management of the operating company.
See 29 C.F.R. § 2510.3-101(d)(3)(ii).
The filed Apollo IG Core Replacement agreement lets the general partner enter into separate agreements with certain limited partners that establish rights under, or alter or supplement, the agreement's terms.
Notwithstanding anything to the contrary in this Agreement, or of any Subscription Agreement, the Partners hereto acknowledge and agree that the General Partner on its own behalf or on behalf of the Partnership, in its sole discretion and without prior notice to or further act, approval or consent of any Limited Partner, may enter into agreements (“Other Agreements”) with certain Limited Partners that have the effect of establishing rights under, or altering or supplementing the terms of, this Agreement or of any Subscription Agreement with respect to such Limited Partner, including with respect to the Management Fee, withdrawal rights, information rights, voting rights or other rights or the currency in respect of which such Interests are offered.
See Apollo IG Core Replacement, L.P., Second Am. & Restated Agreement of Ltd. P'ship § 11.02 (dated June 30, 2026), filed as Exhibit 3.1.
SEC examination staff observed undisclosed preferential liquidity side letters.
The staff observed private fund advisers that entered into agreements with select investors (“side letters”) that established special terms, including preferential liquidity terms, but did not provide adequate disclosure about these side letters. As a result, some investors were unaware of the potential harm that could be caused if the selected investors exercised the special terms granted by the side letters.
See SEC Office of Compliance Inspections and Examinations, Risk Alert: Observations from Examinations of Investment Advisers Managing Private Funds (June 23, 2020).
What's the process for amending a hedge fund limited partnership agreement?
A hedge fund limited partnership agreement sets the investor vote needed to amend it and may let the general partner make narrower amendments alone.
The SEC staff’s glossary says an LPA governs the limited partner’s relationship with the fund and general partner. Limited partnership agreements filed with the SEC use different voting and manager-only amendment mechanisms. A Stilwell agreement allows general-partner amendments subject to an adverse-effect condition. A Seidman agreement uses a capital-based investor threshold for other amendments. A Lion Fund II agreement requires the general partner and limited partners owning at least 51 percent of interests, and allows consent by silence after notice. The governing LPA determines the vote, class rights, and notice process.
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The filed Stilwell agreement lets the general partner amend without investor notice or consent so long as the amendment is not materially adverse to investors.
The Partnership Agreement may be amended by the General Partner in its sole discretion without notification to, or the consent of the Limited Partners, at any time and without any limitation, so long as such amendment is not materially adverse to the Limited Partners’ interests.
See Stilwell Value Partners I, L.P., Am. & Restated Ltd. P'ship Agreement § 9.1(a) (dated Oct. 1, 2008), filed as Exhibit 10.56.
The filed Seidman agreement requires the general partner and partners holding at least 50 percent of total capital-account value to approve an amendment.
This Agreement may be amended, in whole or in part, by the written consent of (a) the General Partner, and (b) Partners the value of whose Capital Account constitute not less than fifty percent (50%) of the total value of all Capital Accounts of the Partnership, provided that no such amendment shall affect the allocation of Net Profit or Net Loss to any Partner who has not consented to such amendment.
See Seidman Investment Partnership II, L.P., Second Am. & Restated Agreement of Ltd. P'ship § 57 (dated Oct. 15, 2005), filed as Exhibit 99.5.
The SEC staff describes the limited partner and its LPA relationship.
A limited partner is an investor who commits capital to a private fund. Unlike a general partner, a limited partner’s participation in the fund’s investment activities is restricted, and its personal liability for fund debt is limited to the amount of money that the limited partner contributed or committed to contribute. The relationship of a limited partner with the fund and the general partner is governed by a Limited Partnership Agreement.
See SEC Small Business Glossary.
The filed Lion Fund II agreement requires amendments to be executed by the general partner and limited partners owning at least 51 percent of limited partners' interests, which may be given by negative consent.
Amendments or modifications may be made to this Agreement only by setting forth such amendments or modifications in a document duly executed by the General Partner and Limited Partners owning at least fifty-one percent (51%) of the Interests of all of the Limited Partners (which may be in the form of a negative consent, such that a Limited Partner will be deemed to have consented to a proposed amendment if the General Partner does not receive notification of such Limited Partner's objection within ten business days of the General Partner's providing notice of the proposed amendment to such Limited Partner).
See The Lion Fund II, L.P., Second Am. & Restated P'ship Agreement § 14.07 (dated May 26, 2021), filed as Exhibit 10.1 to Biglari Holdings Inc. Form 8-K.
What should a hedge fund agreement say about dissolution?
A hedge fund agreement says what happens when the fund dissolves, and a limited partnership agreement filed with the SEC for Stilwell Value Partners has the general partner liquidate the fund or appoint a liquidator.
The SEC staff’s glossary says an LPA governs a limited partner’s relationship with the fund and general partner. In a Stilwell agreement filed with the SEC, the general partner liquidates the partnership or appoints a liquidator after dissolution. For an adviser using the custody rule’s pooled-vehicle audit route, the rule calls for an audit upon liquidation and prompt distribution of audited statements afterward.
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The filed Stilwell agreement requires the general partner, on dissolution, to liquidate the partnership's affairs or appoint a liquidator, with a fallback liquidator appointed by limited partners holding more than half of partnership percentages.
Upon dissolution of the Partnership, the General Partner shall promptly liquidate the business and administrative affairs of the Partnership, or shall appoint a liquidator to do so however, if the General Partner is unable to liquidate the Partnership, or appoint a liquidator, a Person appointed by the holders of more than 50% of the aggregate Partnership Percentages of all Limited Partners shall liquidate the business and administrative affairs of the Partnership.
See Stilwell Value Partners I, L.P., Am. & Restated Ltd. P'ship Agreement § 8.2(a) (dated Oct. 1, 2008), filed as Exhibit 10.56.
The SEC staff describes the limited partner and its LPA relationship.
A limited partner is an investor who commits capital to a private fund. Unlike a general partner, a limited partner’s participation in the fund’s investment activities is restricted, and its personal liability for fund debt is limited to the amount of money that the limited partner contributed or committed to contribute. The relationship of a limited partner with the fund and the general partner is governed by a Limited Partnership Agreement.
See SEC Small Business Glossary.
Rule 206(4)-2(b)(4)'s pooled-vehicle annual-audit route requires annual generally accepted accounting principles financial statements distributed within 120 days after fiscal year-end, an independent public accountant meeting the stated PCAOB conditions, and audited statements upon liquidation.
You are not required to comply with paragraphs (a)(2) and (a)(3) of this section and you shall be deemed to have complied with paragraph (a)(4) of this section with respect to the account of a limited partnership (or limited liability company, or another type of pooled investment vehicle) that is subject to audit (as defined in rule 1-02(d) of Regulation S-X (17 CFR 210.1-02(d))): (i) At least annually and distributes its audited financial statements prepared in accordance with generally accepted accounting principles to all limited partners (or members or other beneficial owners) within 120 days of the end of its fiscal year; (ii) By an independent public accountant that is registered with, and subject to regular inspection as of the commencement of the professional engagement period, and as of each calendar year-end, by, the Public Company Accounting Oversight Board in accordance with its rules; and (iii) Upon liquidation and distributes its audited financial statements prepared in accordance with generally accepted accounting principles to all limited partners (or members or other beneficial owners) promptly after the completion of such audit.
See 17 C.F.R. § 275.206(4)-2(b)(4)(i)-(iii).