What are the tax implications of becoming a limited partner/investor in a hedge fund?

At the end of each year a Hedge Fund as a limited partnership reports in a K-1 form gains or losses for the trades the fund made that year. These gains or loses are treated as are any other capital gain. It is important to note that the return of a fund is separate from the taxable gains and losses the fund has made over the course of the year. For example, it is possible that a fund may have "realized" a loss for tax purposes but have reported positive performance (capital appreciation) through unrealized gains. The opposite is also possible.

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What is the minimum investment in a hedge fund?

The minimum investment varies from fund to fund, and is set by the General Partner (GP). It is common for new hedge funds to open up with minimum investments of $250,000 or $500,000. Established funds can have much higher minimums; $10,000,000 is not unheard of. In most cases, the GP can waive the minimum at his sole discretion. This is often done to accommodate investors who intend to make an investment equal to or greater than the stated minimum over time, but do not want to start that high.

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What is a qualified purchaser?

An investor is a "qualified purchaser" (sometimes referred to as a "super accredited" investor) if the investor is an:

• Individual who own $5 million or more in investments, including investments held jointly with a spouse.
• Family-held business that owns $5 million or more in investments.
• business that has discretion over $25 million or more in investments
• trust sponsored by qualified purchasers 
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