Hedge funds:What are they?

Hedge funds have been making the news lately and I am not surprised that they are. Hedge funds, like mutual funds, basically pool money from investors and invest that money. Mutual funds are tightly regulated, while hedge funds are not regulated. So a mutual fund is restricted to some or one type of investment vehicle, while hedge funds are not. So hedge funds can invest in anything, thats right, anything. Hedge funds can invest in stocks, futures, options, bonds, swaps, forex, commodities, derivatives, etc. Hedge funds can also be called absolute return funds because they make money for the investors despite how the current markets are doing. Mutual funds,however, usually go down when the market goes south. Hedge funds are for only accredited investors, meaning that your net worth has to be 1 million dollars. This benchmark limits hedge funds to only the wealthy. Some hedge funds have very high minimum investments ranging from $250,000 to $1M or sometimes even more.
On top of the high up front investments, the investors are usually told that their money has been locked in, meaning they cannot get their money back for some time, which could be months or one to 2 years. Hedge funds have to do this in order to keep the investors money in the portfolio instead of having to sell parts of the portfolio to give the investor back their money with any profits on the money. After the lock in period is over, hedge funds usually have enough of a profit to give back  investors their  money with the profit. One downfall for hedge fund investors is that the fund can lock in their money anytime if the hedge fund's portfolio looks bad. Hedge funds cannot advertise like on tv, so information about the hedge fund usually travels by mouth.

The Hedge fund manager, the person who is in charge of all the securities that are in the hedge fund's portfolio, is the one guy who makes the real money. Hedge Fund managers are usually the people who actually start the hedge fund. Hedge fund managers usually charge the" 2:20" meaning they get 2% of the assets in the hedge fund and 20% of all gains of the fund. This is why hedge fund managers are extremely rich. If a hedge fund makes $600M in one year, the hedge fund manager alone gets 20% or 120 million dollars. I certainly wouldn't mind that paycheck. Hedge funds are only successful if they make make money for the investors, which is different from traditional mutual funds. A mutual fund manager gets paid a certain percentage of the mutual fund even if the fund loses alot of money. So I guess the hedge fund managers salary is not too much for the manager. They spend alot of time speculating and they should get paid a very good salary for their work. The hedge fund only makes money if the investors make money. So price comes with performance. It is not surprising that each year more and more hedge funds are being created( more than 15,000 hedge funds exist today) , because the hedge fund industry is a lucrative one  and is here to stay for many generations.

2 Comments

  1. Fund Investing

    December 19, 2009 at 6:16 am

    Hedge funds have used these lines recently to extend themselves into newer types of debt. Fund Investing

  2. Aditya

    December 19, 2009 at 6:01 pm

    What do you mean by “used these lines”?

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