A hedge fund's legal architecture solves problems that have nothing to do with its trading strategy. A master-feeder structure lets investors with different tax and regulatory needs pool into a single trading vehicle without contaminating each other's treatment: US taxable investors subscribe through a US feeder (typically a Delaware limited partnership), while non-US investors and US tax-exempt investors (pensions, endowments, who care about avoiding "unrelated business taxable income" generated by US-source leveraged trading) subscribe through an offshore feeder (typically a Cayman corporate vehicle); both feeders invest substantially all of their assets into one master fund, which does all the actual trading, so the manager runs a single book while each investor class gets the wrapper appropriate to it. Both feeders subscribe into (and redeem from) the master at NAV parity, one NAV per master-fund share, adjusted only for each feeder's own (typically small) local expenses.
How do side pockets and redemption limits work?
A side pocket is an accounting mechanism, not a trade: the fund manager ring-fences an illiquid or genuinely hard-to-value position (a private placement, a distressed claim, anything without a reliable daily price) out of the fund's regular, freely-redeemable NAV. An investor who redeems their entire stake still receives their pro-rata share of the liquid NAV in cash promptly, plus a stub interest in the side pocket itself, which is paid out only when that position is eventually sold, restructured, or written off, sometimes years later. A redemption gate is a cap, typically stated as a percentage of the fund's total NAV (15% per quarter is a common order of magnitude), on how much of the fund can be redeemed in any single window; when requests exceed the cap, funds typically honor requests pro rata, everyone gets the same fraction of what they asked for, with the remainder carried to the next redemption window, rather than paying early requesters in full while later ones get nothing. A gate exists to prevent a run: without one, a wave of redemption requests could force the manager to dump the fund's most liquid holdings to raise cash, leaving remaining investors holding a portfolio skewed toward whatever was too illiquid to sell in a hurry, a genuine harm to the investors who stayed. A lock-up restricts redemption for a stated initial period after subscription; a hard lock-up bars redemption entirely during that window, full stop, while a soft lock-up permits early redemption but charges an explicit penalty (a few percent of the redemption amount is typical). All four mechanisms exist for the same underlying reason: a fund's redemption terms should match the liquidity of what it actually holds, and a strategy trading genuinely illiquid instruments that promised daily liquidity to its investors would be signing a check its portfolio cannot cash, the 2008 wave of hedge-fund gating and side-pocket use across the industry, well documented in the financial press of the period, is the real-world proof of what happens when that mismatch is discovered all at once.
Advertisement
{
"skill": "Extracting a real fund's actual fee and structural terms from its own regulatory filing, instead of a marketing summary",
"use": "Have a document-analysis AI read a US adviser's actual Form ADV Part 2A brochure (pulled yourself from the SEC's public IAPD site) or an Indian Category III AIF's placement memorandum, and summarize the stated management fee, incentive fee, hurdle type, high-water mark language, gate, and lock-up terms in one table — as a reading aid over a document you hold, not as a recall exercise.",
"tools": ["Document/PDF AI grounded on the actual filing (not a bare chat query about the fund by name)", "SEC IAPD (adviserinfo.sec.gov) to obtain the real Form ADV in the first place"],
"prompt": "Here is <FUND ADVISER>'s Form ADV Part 2A (attached). Extract, with the exact page/section for each: the management fee rate and base (NAV, committed capital, or something else), the incentive fee rate, whether a hurdle is disclosed and its type (hard/soft), any high-water mark language, and any disclosed gate or lock-up terms. Quote the exact clause for each; do not paraphrase a number you cannot point to.",
"verify": "Never ask a bare model 'what does Fund X charge' and accept the answer — hedge funds have no public financials and performance is self-reported into paid databases with known survivorship/backfill bias, making this the highest AI-over-trust-risk region in the program (say so to yourself before every query). Confirm the document is the real, current Form ADV from IAPD or the fund's own placement memorandum (Guardrail #1 Trace, #4 Date-check), and recompute at least one full fee-year by hand from the disclosed parameters (Guardrail #3) before trusting the AI's summary table.",
"diy": "You must already be able to build the fee waterfall from raw parameters by hand (the section above) before delegating extraction to a tool — otherwise you have no way to notice the AI silently mis-summarizing a soft hurdle as a hard one, which changes the investor's actual economics enormously, as this module's own comparison table shows.",
"market": "US"
}