Incentive Allocation Clause
(Hedge Funds)

Summary

This incentive allocation clause is to be used in hedge fund (HF) limited partnership agreements to document the HF general partner's right to receive compensation from investors for a portion of any investment gains of the HF. The clause details the process and limitations for such payment amounts. This clause includes practical guidance and drafting notes. This incentive allocation clause is drafted assuming that the HF is a domestic limited partnership. Note that the legal form and jurisdiction of a HF can vary, and accordingly, the terms related to a HF's incentive allocation can also take on many formulations. For example, an incentive allocation may also be referred to as a "performance allocation" or "performance fee", depending on a HF's characteristics. Such differences present a number of complex tax considerations that counsel and the HF should carefully evaluate. This clause should be read in conjunction with the practice notes Hedge Fund and Its Offering: Drafting and Reviewing the Key Documentation. This clause assumes that it will be included in a HF limited partnership agreement. For a full listing of related investment management content, see First Year Associate Resource Kit: Investment Management.