Hedge funds are typically formed as
limited partnerships
or offshore corporations. Each partnership has a general partner (GP) or partners and raises money from investors who become limited partners (LP). The general partner is responsible for running the fund, including building a staff and investing the fund's assets, and can be held personally responsible for any debts the partnership incurs. Limited partners, in contrast, have no responsibility for making investment or management decisions and they're not liable for partnership debts. The most they can lose is the amount they invest — though with a hedge fund that is often a substantial amount.
In order to become a limited partner, an individual or institution must be an accredited investor. An accredited investor, by Securities and Exchange Commission (SEC) definition, is an individual who has a net worth of at least $1 million or annual net income of more than $200,000 if single or $300,000 if married. An institution must have a net worth of at least $5 million.
