In order for offshore...
5.17 In order for offshore investors to avoid backup withholding, the U.S. Internal Revenue Service must deem the hedge fund to be a non-U.S. business. If the fund is administered in the United States, the IRS will probably assert that the business is a U.S. entity and require the fund to withhold taxes for the offshore investors.
Hedge Fund Leverage
6.1 The stock loan agreements that show up as liabilities include the money borrowed to finance the long stock positions. Traders think of this cash as collateral, but accountants view it as a short-term loan that must be repaid. Note that the accounting records do not document that the stocks held as long positions are actually being held by a dealer because the hedge fund still represents that it owns the common (even though it doesn't currently possess or even have legal title to the shares).
The stock loan agreements that show up as assets include the money posted with other dealers to collateralize shares that the hedge fund has borrowed. Accountants treat this transaction much like a certificate of deposit: The fund has delivered cash to an arm's-length counterparty, who will return the cash with interest.
The $60 million in stock loan assets represent the cash that is collateralizing $50 million of borrowed securities. The $10 million difference represents the haircut or collateral that the securities lender requires. The $30 million in stock loan liabilities represents the cash that is borrowed by the fund. These loans are secured by some of the $40 million in common stock held as long positions. The $10 million difference represents a haircut or required margin. The fund may also have excess collateral, which gives the fund some room to lose money on its positions without being thrown into liquidation. It is also possible that the fund holds some positions that cannot be financed (restricted stock, small private issues, or other nonmarginable positions).
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