The foundational structural distinction between a hedge fund and a venture fund is that hedge funds are open-ended — investors can typically subscribe at regular intervals and redeem their interests on periodic schedules — whereas venture funds are closed-ended, with committed capital locked up for the life of the fund (typically ten years) absent extraordinary circumstances. A hedge fund's open-ended structure is enabled by its investment mandate: trading in liquid securities (equities, fixed income, derivatives, commodities, currencies) generates NAV that can be calculated daily or weekly and distributed to redeeming investors without impairing the remaining portfolio. Redemption rights are a defining feature that LPs use to manage their allocations, and their absence in a venture fund is a feature, not a bug — illiquid portfolio companies cannot be partially liquidated to fund LP redemptions without destroying value. Gurpreet Bal advises clients forming hedge funds that the redemption mechanics — lock-up periods, redemption notice requirements (typically 30–90 days), redemption gates, and liquidity reserves — are among the most consequential provisions in the fund documents, because they determine the fund manager's ability to manage the portfolio without being forced into liquidations to meet investor outflows at inopportune times.
Hedge fund economics follow the "two and twenty" model: a 2% annual management fee on net assets, and a 20% performance allocation (carried interest) on net profits. While fee compression has reduced these rates for many managers — particularly those without top-quartile track records — the model remains the market standard. The critical economic protection for hedge fund investors is the high-water mark (HWM): the GP is not entitled to a performance allocation on any profits until the fund has recovered all prior losses and returned to its previously highest NAV. This ensures the GP does not earn performance fees on recovering losses — only on generating new highs. Hurdle rates, less common in equity-focused hedge funds but prevalent in credit and macro strategies, require the fund to generate a minimum annual return (often linked to a benchmark such as SOFR plus a spread) before the GP earns any performance allocation above that threshold. Gurpreet S. Bal advises fund managers that the HWM and hurdle rate provisions are major LP negotiating priorities and should be drafted with precise definitions of "net profit," "net loss," and the consequences of investor-level subscriptions and redemptions at different NAV levels — a complexity that does not exist in venture fund carried interest calculations.
Hedge funds that invest in illiquid assets alongside liquid ones — a common practice in credit strategies, litigation finance, or funds that take positions in pre-IPO companies — use "side pockets" to segregate illiquid positions from the liquid portfolio. When an investment is designated as a side pocket, it is carved out of the main fund's NAV for redemption purposes: redeeming investors receive their pro-rata share of the liquid portfolio in cash but receive a non-redeemable interest in the side pocket, to be distributed only when the illiquid asset is ultimately realized. Side pocket provisions are heavily negotiated and require careful drafting — they can be used abusively to trap investors in underperforming positions, and the SEC and CFTC have scrutinized their use closely. Redemption gates give the GP the right to limit redemptions during any given period — often to no more than 10–25% of total fund NAV — when redemption requests would otherwise require the fund to liquidate positions at adverse prices or in illiquid conditions. Gurpreet Bal advises hedge fund managers that gates and side pockets, if used improperly or inconsistently, damage investor relationships and expose the GP to breach-of-contract and fraud claims; they must be clearly disclosed in the offering memorandum and applied uniformly to all similarly situated investors.
Hedge fund managers are generally required to register as RIAs with the SEC once their RAUM exceeds $150 million, because hedge funds do not qualify as "venture capital funds" under Section 203(l) and hedge fund managers typically cannot maintain the sub-$150 million AUM required for the 203(m) ERA exemption for long. Full RIA registration imposes compliance infrastructure requirements — a formal compliance program, a designated CCO, ADV brochure disclosures, and regular SEC examination exposure — that are more demanding than the obligations of a venture fund ERA. Hedge funds with RAUM exceeding $1.5 billion must also file Form PF with the SEC quarterly (large hedge fund filers), providing systemic risk monitoring data. Prime brokerage relationships — hedge funds' primary execution, financing, and custody relationships — introduce additional operational and contractual complexity that does not exist in venture fund administration. Gurpreet S. Bal advises fund managers considering multi-strategy platforms that adding a hedge fund to an existing venture platform requires a complete re-analysis of the manager's investment adviser registration status, may require a separate management entity, and will significantly expand the compliance program. The formation of a hedge fund requires counsel familiar with both the structural documentation and the regulatory overlay — the legal work involved is materially different in scope and complexity from venture fund formation.
Gurpreet S. Bal is a Partner at Foley and Lardner LLP in Silicon Valley, where he advises venture funds, fund managers, founders, and investors on fund formation, venture financings, M&A, and corporate governance. He has represented clients in hundreds of transactions with aggregate deal value exceeding $60 billion across AI, semiconductors, fintech, and emerging technology.