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Doing Business in Israel: Hedge Funds


So far in 2022, about 180 hedge funds in Israel are managing approximately USD 15.9 billion. (Of course, the exact number of hedge funds is unknown since hedge funds in Israel do not need to publish a prospectus or operate according to any regulatory license.) Hedge funds can prove to be a particularly attractive channel in a small market like Israel, precisely because more sophisticated investment strategies and exposure to the international capital market are necessary to create added value over the “usual” market volatility. What’s more, the connection to the fund’s management is simpler in Israel and provides a better potential ability to control the quality of the fund’s management.

Incorporating a Hedge Fund

Most hedge funds in Israel incorporate as registered limited partnerships. The limited partners are the investors in the fund. The general partner, whose liability for the fund’s debts is not limited, can also be the fund’s manager. Furthermore, in Israel, the general partner in the partnership will often be a limited liability company. Thus, it can limit the legal liability of the entrepreneurs that founded the fund.


The partnership agreement regulates the relationship between the partners (the investors) and the fund: how much each partner invests, when each partner can withdraw its money if it wants to, when distribution of profits occurs, remuneration of the fund manager (usually a combination of a fixed percentage of the investment and a particular percentage of the profits), if the fund has an administrator, which channels the fund will invest in, etc. Concurrently, and without any State regulation, the partnership agreement also determines the management fees and their characteristics (high water mark, achievement of return targets, etc.), if the fund will have a tax trustee, etc.


Recruiting Investors


Since this is a relatively unregulated field, an Israeli hedge fund’s management is responsible for supervising offers to potential investors. The Israeli Securities Law prescribes that a hedge fund may publish an investment offer to a maximum of 35 investors (excluding qualified investors) over 12 calendar months, even if not all 35 offerees actually executed an investment. In any case, even without the 12-month limit, a hedge fund may not recruit more than 50 investors (excluding qualified investors). Split strategies (joint management of several funds) is permissible, as long as the split is not artificial. If a fund makes an artificial split to evade the limit on the number of investors and offerees, the fund’s entrepreneurs could find themselves under investigation by the Israel Securities Authority.


As a result, many hedge funds limit themselves to accepting solely qualified investors, i.e., private individuals who, due to their financial robustness, the legislature assumes do not need protection similar to that granted to small investors. Qualified investors, as well as institutional investors, may receive investment offers without needing a prospectus and do not count among the 35-investor limit.


The definition of “qualified investor” in the Israeli Securities Law, correct to September 2022, is as follows:


Individuals fulfilling one of the following criteria:


1. The inclusive value of the liquid assets owned by the investor exceeds ILS 8,364,177.


2. The investor’s income in each of the last two years exceeds ILS 1,254,627, or the income of the family unit exceeds ILS 1,881,940.


3. The inclusive value of the liquid assets owned by the investor exceeds ILS 5,227,610, and the investor’s income in each of the last two years exceeds ILS 627,313 or the income of the family unit in each of the last two years exceeds ILS 940,969.

Taxation of Hedge Funds

In terms of taxation, hedge funds are “transparent” partnerships, i.e., tax is not imposed on them but only on the funds’ partners, depending upon their profits. (Non-transparent hedge funds exist in Israel, but are rare.) That being the case, the partners must verify several aspects pertaining to taxation of their profits. The fund’s articles of association should regulate such aspects. In many instances, fund managers choose to apply to the Israel Tax Authority before the fund commences activities to obtain a tax pre-ruling that regulates the taxation of the hedge fund.


The tax pre-ruling may include the following:


1. The fund will be exempt from deducting withholding tax, subject to receiving a tax withholding certificate concurrent with the receipt of the tax pre-ruling. The general partner and the trustee will be responsible for deducting withholding tax from the profits of the fund’s investors, according to the instructions in the pre-ruling.


2. The partners’ profits will be taxed as capital gains and not as employment income, a classification that qualifies for a lower tax rate (25% or 30% correct to 2022, depending upon the fund’s fulfillment of particular criteria).


3. Foreign resident investors in the fund will not have to file tax reports in Israel merely as a result of their investment in the fund.


4. The timing of each of the investors’ tax liability will be as follows: (1) The fund’s operating results will be taxed at the end of the tax year (regardless of realization). (2) Profit distribution, redemption proceeds, sale, or liquidation will be taxed when they occur.



Dr. Zvi Gabbay heads our Capital Markets department. Zvi possesses extensive experience in Israel and in the United States, representing corporations and individuals in various aspects of their operations, mainly in the areas of financial regulation, securities, capital markets and international litigation.


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