How do the legal needs or requirements of investors influence the setting up of hedge funds? What, if any, are the differences between different types of investors, say family offices and institutional investors?

Ingrid Pierce at Walkers in the Cayman Islands says issues related to transparency may differ. “Certain institutional investors that allocate a substantial amount of their investable assets to a particular manager or fund may require special terms, such as their own class of shares, portfolio or fund,” says Pierce.

At Appleby in Cayman, Gray Smith believes the needs of most investors are largely the same: good returns, transparency, liquidity and a good dispute resolution forum. “Logic would, therefore, send you to the major centres with a solid court system and a number of good law firms who can advise the various sides in any conflict,” he concludes.

Nicholas Butcher in the Cayman Islands practice of Maples and Calder points out that the landscape following the restructurings of hedge funds has changed in relation to exit terms. “Investors are looking for a matching of asset type to liquidity and are bearing down on suspension criteria. Investors want access to capital and are having a greater influence over the structuring of funds,” he says.

The tax profile of different investors can be radically different, notes John Langan at Withers in London. “Institutional investors may often operate on an essentially tax-neutral basis whereas for family office investors tax treatment is a key driver in decision-making,” says Langan.

“It is key for hedge fund start-ups to identify their likely investors and develop their fund structure to suit them. It can, of course, be possible through feeder structures to try to accommodate investors with very different tax profiles,” he says.

An important current issue for funds with UK investors, points out Langan, is the reporting fund status that comes into effect later this year. “Some hedge funds may qualify for reporting fund status which will give UK-resident investors capital gains tax (18%) treatment rather than income tax treatment at rates of up to 50% from April 6, 2009. If funds can obtain reporting fund status, they will give themselves a competitive marketing advantage in the UK marketplace,” he concludes.

Nora Bullock and Simon Atiyah at Lovells in London think hedge fund managers targeting certain investor groups or specific investors will structure and locate their funds to accommodate particular investor groups.

As laws and investment mandates become tighter, say the pair, other structural considerations may become more important, such as investor requirements for independent boards or greater investor reporting. For onshore EU funds this may result in hedge funds adopting different models.

Omar Zerafa at Aequitas Legal in Malta agrees the legal needs and requirements vary according to the type of investor. “Individual investors may be more interested in getting tax exemptions and personal investment advice. Larger institutions and family offices would normally have greater lobbying power and would normally seek to have a say in the administration of the fund,” notes Zerafa.