1. Transatlantic Structuring Issues and Trends Daniel S.Shapiro & Richard Thompson October, 2005

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3. The Transatlantic Trends  US Hedge Fund Managers open offices in London  Early 1990s – Largest Fund Managers (“Global Macro”)  Mid 1990s  Merger Arbitrage Funds  Long/Short Equity Funds  Multi-Strategy Funds

4. The Transatlantic Trends  Recent London Office Openings  Emerging Markets  Fixed Income Funds – Distressed Debt, Convertible Arbitrage  Commodities Funds – European Based Trading  Fund of Funds

5. The Transatlantic Trends  Simultaneous openings in US and London  “Reverse Openings”  London-based Managers opening offices in US  “Spin-offs” from London offices of Institutions (investment banks; banks) and Hedge Funds

6. US Firm Establishing a UK office  Types of UK Offices  Research only  Marketing  Full Trading  Number of Considerations  Tax and Regulatory Issues

7. UK Office  Separate Legal Entity to avoid tax/regulatory issues for US Management Entity  Choice of entity – typically corporate vs. LLP

8. Choice of Entity  UK Limited Company – well understood; limited liability for shareholders; simple to establish  UK LLP – limited liability partnership; hybrid: transparent for tax purposes and treated as corporate for other purposes; generally limited liability for members; tax advantages, include ability to admit new members into LLP and make changes in their interest without “compensation” tax risks; flexible – terms can be set out in the LLP Agreement  LLP may not be suitable where US Firm is a large corporate institution

9. LLP Tax Advantages  Corporate employer pays 12.8% National Insurance (“NI”) in respect of its employees’ salaries  LLP does not pay NI in respect of its members’ profit allocations  LLP members or employees subject to same NI rates

10. LLP Structure  LLP members usually include the key UK individuals as well as UK limited company as a corporate member  Corporate member typically wholly owned by US management entity  Corporate member and LLP “check the box” to be treated as transparent for US tax purposes.

11. Corporate Member  Corporate Member typically has majority of voting rights in LLP  Corporate Member will also make decisions on certain key matters, e.g. appointment and removal of members  Allocations of LLP income often decided by Corporate Member subject to contractual provisions  Income allocated to Corporate Member can be dividended to US parent (30% UK tax credited against US tax liability of individual owners of US parent company)

12. LLP Members  LLP members should not be disguised employees for UK tax purposes  Members should be appropriately senior individuals, with some capital at risk in the business and some voting rights

13. Fees  UK tax rules (the “Investment Manager Exemption”) require the “customary” rate of remuneration to be paid to the UK entity for the services it provides  Need for Transfer Pricing Study must be considered

14. Regulatory Issues  Certain activities conducted from the UK require FSA permission  Investment management, investment advisory and fund marketing all mean the UK entity should be FSA registered unless an available exemption applies, for example, investment research and advice provided to the US parent under the available “group exemption”

15. FSA Registration Process  Substantial application pack to complete  Details of structure; ownership; personnel and projected finances

16. Controllers  Persons with 10% or more of the capital or voting rights of the UK entity to register with FSA as controllers  Ultimate controllers to be disclosed  Due diligence type information to be provided  Individuals with a 30% or greater interest to provide statement of net worth

17. Approved Persons  CEO and Compliance Officer of UK entity to be UK based – FSA want to see “mind and management” of the UK entity in the UK  Investment Managers to demonstrate “competence” – may require exam passes/waiver applications  FSA generally require 2 investment managers – if only one then establish procedure if that individual is incapacitated

18. No Conditional Approval  Regulated activities may not be conducted prior to obtaining FSA authorisation  Note: conducting regulated activities without FSA authorisation is a criminal offence

19. US Firm with Existing UK office  Many US firms initially established UK offices as corporations  Tax efficiencies have prompted many of them to convert those UK corporations to LLPs  Converting to new legal entity means new FSA registration required  Expedited FSA application process exists for a simple change of entity

20. US Firm with Existing UK office  On receipt of FSA approval novate investment management agreements to new LLP and contribute existing business to LLP  To avoid CGT on disposal, existing entity contributes business at agreed value and retains right to allocation of same value on sale/winding up

21. Structure of US Manager Entity  Structure of separate US Management Company – simplest structure is to use a corporation. However, this is tax disadvantageous because corporation taxes (Federal, New York State and New York City) on profits would be at an effective tax rate of about 46%. If US corporation owned by UK LLP or its members, no tax credit on UK tax return would be available for US taxes paid.

22. Preferred Tax Structure  US Limited Partnership with principals of UK manager serving as LPs. Effective US tax rate in profits, if office in NY, is 42%  Major issue is – will individual members of UK management entity be willing to file US tax returns, even if only their income “effectively connected” with the business of the US manager will be reported?

23. Alternative Structure - Use of UK LLP  Alternative to avoid US tax filings by UK individuals – Formation of UK LLP to be LP of US Partnership  UK LLP (treated as a corporation for US tax purposes) files US Federal and NY State and City tax returns  Higher net tax rate (46%), but UK individual partners not required to file US returns. However, because UK LLP is transparent for UK tax purposes, individual UK LLP members will get a UK tax credit for US taxes paid by UK LLP

24. Use of UK LLP  Repatriation of US Partnership Income  US withholding tax of 5% can be avoided if at least 95% of voting and value of UK LLP owned directly or indirectly by 7 or fewer individuals

25. Deferred Fee Plan for Partners  If UK LLP used, US Manager cannot have an effective fee deferral arrangement with offshore fund because any partnership having a corporate partner must report its income on accrual method, not the cash method. If US partnership has only individual Limited Partners and no UK LLP partner – US Manager can implement with offshore fund effective deferred fee Agreement for UK principals who are partners and, perhaps more importantly, US traders who expect to be able to defer some portion of their share of incentive fees payable to US Manager by offshore fund.