{ "id": "6c262ae5-a4cb-520d-ae43-b3bca1e84474", "slug": "lp-agreement", "term": "LP Agreement", "aliases": [], "category": "Fund Operations", "category_slug": "fund-operations", "difficulty": "basic", "definition": "A Limited Partnership Agreement (LPA) is the foundational legal contract governing a limited partnership fund, defining the rights and obligations of the general partner (fund manager) and limited partners (investors), including fee structures, investment mandate, capital contribution and withdrawal mechanics, and governance provisions.", "key_takeaways": [ "The LPA establishes the management fee, performance fee (carried interest), high-water mark provisions, hurdle rate, and crystallization frequency governing the manager's economic compensation.", "Redemption provisions in the LPA—including notice periods, lock-up terms, gate provisions, and side pocket mechanics—control when and how limited partners can withdraw capital.", "The investment mandate section of the LPA defines permissible strategies, instruments, geographic scope, and concentration limits that constrain the general partner's investment discretion.", "Most-favored-nation (MFN) clauses allow certain investors to receive the best economic terms offered to any LP, governing side letter negotiations and ensuring equitable treatment among investors.", "LPAs for private equity and hedge funds differ significantly: PE LPAs govern 10-year closed-end vehicles with capital calls, while hedge fund LPAs govern open-end vehicles with ongoing subscriptions and redemptions." ], "detailed_explanation": "The Limited Partnership Agreement is the constitutional document of a fund structured as a limited partnership—the predominant legal form for both hedge funds and private equity vehicles. The LP structure allocates management and liability in a way that suits collective investment: the general partner (GP), typically an entity controlled by the fund manager, has unlimited liability and full investment discretion, while limited partners (LPs), the investors, have limited liability (capped at their invested capital) but no voice in day-to-day investment decisions. This arrangement is foundational to the fund manager's ability to act decisively without investor committee approval while giving investors legal protection.\n\nThe economic terms section of an LPA governs the financial relationship between the GP and LPs. The management fee—typically 1–2% of net asset value per annum for hedge funds and 1.5–2% of committed or invested capital for private equity—provides the GP with a stable revenue stream to cover operational costs. The performance fee (performance allocation in hedge fund parlance; carried interest in private equity) is usually 20% of profits subject to a high-water mark: the GP only earns a performance fee on profits that exceed the fund's previous peak NAV. Hurdle rates—minimum return thresholds (typically 8% annualized) that must be exceeded before the GP earns carried interest—are more common in private equity than hedge funds. Crystallization frequency determines when performance fees are calculated and allocated—quarterly, annually, or at redemption.\n\nRedemption provisions in a hedge fund LPA define the liquidity profile investors can expect. An initial lock-up period (commonly one to three years for hedge funds; fully illiquid for PE) prevents redemptions during the fund's early phase while the portfolio is being built. After the lock-up, investors can typically redeem at quarterly or annual intervals with advance notice (30–90 days is common). Gate provisions allow the GP to restrict aggregate redemptions in any period to a percentage of the fund's NAV (typically 10–25%) to prevent forced asset sales during market stress. Side pockets segregate illiquid positions from the main portfolio; investors can only redeem their side pocket allocation when the underlying asset is realized or distributed.\n\nInvestment mandate provisions define the boundaries of the GP's discretion. These include asset classes, geographies, instruments (e.g., whether derivatives and leverage are permitted), maximum single-issuer concentration limits, and liquidity requirements. The mandate must balance sufficient flexibility for the manager to pursue alpha with adequate guardrails to protect investor interests and ensure the fund operates as represented in the offering memorandum. Material changes to the investment mandate typically require LP consent, often from a majority-in-interest or supermajority of LP commitments.\n\nGovernance provisions address the investor advisory committee (LPAC), key-man provisions, removal rights, and conflict-of-interest policies. The LPAC, composed of representative major LPs, provides oversight and must approve certain GP actions (e.g., extending the fund term, valuing illiquid assets, approving related-party transactions). Key-man provisions allow LPs to suspend or terminate the fund if specified key investment personnel depart, protecting investors' interest in the continued involvement of the individuals they backed. Removal-for-cause provisions grant LPs the right to replace the GP in cases of fraud, gross negligence, or willful misconduct.", "example": "A hedge fund manager launches a credit-focused hedge fund as a Delaware limited partnership. The LPA specifies: management fee of 1.5% per annum on NAV, calculated monthly; performance fee of 20% of net profits subject to a high-water mark and a 6% annual hurdle rate, crystallized annually on December 31; a 12-month initial lock-up followed by quarterly redemptions with 60 days' notice; and a 15% gate on aggregate quarterly redemptions. An LP invests $10 million at inception. At year-end, the fund has earned a 14% net return before performance fee. The 6% hurdle means the performance fee applies to returns above 6%, so the fee base is 14% − 6% = 8% of $10 million = $800,000; 20% performance fee = $160,000. The LP net return after the performance fee but before the management fee is $1.4 million − $160,000 − $150,000 (management fee) = $1.09 million, or approximately 10.9% net. The LP is now in lock-up and cannot redeem until the lock-up expires, 12 months after the initial investment date.", "formula": "Performance Fee = max(0, (NAV_t − HWM) × Incentive Rate); subject to: NAV_t > HWM × (1 + Hurdle Rate)", "formula_latex": null, "interactive_type": "calculator", "calculator_id": null, "related_terms": [ "alpha", "auditor", "capital-account", "carried-interest", "commodity-pool-operator", "cover", "crystallization", "delaware-limited-partnership", "equity", "general-partner", "hedge-fund", "hurdle-rate", "invested-capital", "leverage", "liquidity" ], "backlinks": [ "high-water-mark", "notice-period", "rvpi-residual-value-to-paid-in", "side-pocket-account" ], "cross_references": [ "alpha", "carried-interest", "cover", "crystallization", "delaware-limited-partnership", "equity", "general-partner", "hedge-fund", "hurdle-rate", "invested-capital", "leverage", "liquidity", "lock-up-period", "management-fee", "net-asset-value", "performance-fee", "private-equity", "redemption", "side-pocket" ], "tags": [ "level:basic", "cat:fund-operations" ], "asset_classes": [], "regulators": [], "see_also": [], "sources": [], "wordcount": 905, "checksum": "16af822aa3eba989", "version": "2026.05.03", "license": "CC-BY-4.0", "updated_at": "2026-09-07T02:15:24+00:00", "_links": { "self": "https://hedgefund.wiki/api/v1/terms/lp-agreement", "jsonld": "https://hedgefund.wiki/api/v1/terms/lp-agreement?format=jsonld", "markdown": "https://hedgefund.wiki/api/v1/terms/lp-agreement?format=md", "graph": "https://hedgefund.wiki/api/v1/graph/lp-agreement", "category": "https://hedgefund.wiki/api/v1/categories/fund-operations", "schema": "https://hedgefund.wiki/schema/term.schema.json", "html": "https://hedgefund.wiki/#/terms/lp-agreement" } }