A question from Yahoo! Answers:

How do you make a hedge fund or create one?

It depends on who your investors are. There are two types of hedge funds, onshore and offshore. Onshore funds are for taxable U.S. investors and are typically structured as limited partnerships. Offshore funds are for tax-free U.S. investors (such as qualified pension plans and university endowments) and international investors; usually, they are structured as corporations domiciled in jurisdictions that have no income tax (Caymans, Bermuda, etc.)

To form a fund, you will need to engage a specialist law firm, which would prepare an offering memorandum and operating agreement, file requisite paperwork with appropriate governments, etc. For an offshore fund, you typically retain two law firms, one in the U.S., another offshore.

Once your fund is formed, you will need to select a prime broker. The choice of broker will depend on how much money you have under management (some brokers would gladly work with a $1M fund, others would have a $20M minimum) and the instruments you plan to trade.

Normally, hedge funds also have independent administrators who verify fund’s performance and send statements to investors and auditors.