This article will outline the how a captive insurance company created by the hedge funds can serve as a highly effective risk management tool while achieving tax benefits for the hedge fund and its principals from both an income and estate tax planning perspective. The use of captive insurers has not been widely exploited by the hedge fund industry at this point in time for no apparent reason other than lack of familiarity. This article will provide examples of how a captive insurer can be used by hedge funds.

Hedge funds and their principals have amassed great fortunes over the last fifteen years. Principals of hedge funds can no longer bask in the anonymity of the early days of hedge funds. A number of hedge fund managers have the profile of global titans of industry occupying solid positions in the Forbes 400 Wealthiest. This trend will likely continue as many hedge funds sitting on piles of cash are also becoming private equity firms taking control of well known publicly traded companies.