| You'll often see the title 'hedge fund manager' in the | | | | all the investment decisions based on the strategy it |
| bios of some of Wall Street's famous investment | | | | outlined in the offering documents. |
| gurus. But what exactly is a hedge fund? How is | | | | In return for managing the investors' funds, the |
| different than any other fund? And how do you get | | | | manager will receive a management fee and a |
| in on the action? | | | | performance or incentive fee. Usually this |
| Hedge funds are private investment partnerships that | | | | management fee is computed as a percentage of |
| are usually offered to limited number of investors and | | | | assets under management, and the incentive fee is |
| require a significant initial minimum investment. Hedge | | | | computed as a percentage of the fund's profits. In |
| funds are normally open to institutional or otherwise | | | | some cases the manager does not receive incentive |
| accredited investors. Those investors are also | | | | fees unless the value of the fund exceeds a "high |
| required to keep their money in the fund for a | | | | water mark." |
| minimum period, usually one year. | | | | Other funds charge no fees until the funds pass |
| Basically, hedge funds are mutual funds for the | | | | specific performance goals. Typical fees for hedge |
| super-rich. They resemble mutual funds in the way | | | | funds are 20 percent of profits plus two percent of |
| investments are pooled and professionally managed, | | | | assets under management. Famous and successful |
| but they are significantly different in the way fund | | | | managers often demand higher fees. |
| can cooperate. | | | | Today, some $1.2 trillion are tied up in some 9,000 |
| Hedge funds are lightly regulated private funds that | | | | hedge funds This is up 19 percent from 2005 and up |
| are usually characterized by unconventional | | | | 300 percent from 2001. At the end of 2004, 55 |
| investment strategies. These funds are generally | | | | percent of the number of hedge funds, managing |
| more aggressively managed and use advanced | | | | nearly two-thirds of total hedge fund assets, were |
| investment strategies such as leverage, long, short | | | | registered offshore. The most popular offshore |
| and derivative positions in both domestic and | | | | location was the Cayman Islands followed by British |
| international markets with the goal of generating high | | | | Virgin Islands and Bermuda. In the US, most funds |
| returns. Regular investment funds are usually limited | | | | are located in New York City, Stamford, Connecticut |
| to 'going long" and buying bonds, equities or money | | | | and Greenwich, Connecticut. London is Europe's |
| market instruments. Hedge funds also have the ability | | | | leading centre for the management of hedge funds. |
| to "short" those instruments they believe will fall in | | | | Investment companies registered with the U.S. |
| price. Hedge funds are thus able to create more | | | | Securities and Exchange Commission (SEC) are |
| complex investment structures which can profit in | | | | subject to strict limitations on the short-selling and |
| times of market volatility, or even in a falling market. | | | | use of leverage that are essential to many hedge |
| In general, hedge funds are lightly regulated because | | | | fund strategies. Although hedge funds fall within the |
| it is believed they cater to sophisticated investors | | | | statutory definition of an "investment company," |
| who need less protection. In the US, the majority of | | | | hedge funds often elect to operate with exemptions |
| investors in the fund must be accredited. An | | | | from the registration requirements by selling only to |
| accredited investor must earn a set minimum income | | | | "qualified purchasers" or "accredited investors" Hedge |
| annually and have a net worth of more than $1 | | | | funds are also only sold via private placement and |
| million. Investment companies registered with the US | | | | cannot be offered or advertised to the general public. |
| Securities and Exchange Commission (SEC) are | | | | Unlike mutual funds, hedge funds do not have to |
| subject to strict limitations on the short-selling and | | | | disclose their activities to third parties. Investors in |
| use of leverage that are essential to many hedge | | | | hedge funds however are entitled to a higher level of |
| fund strategies. Although hedge funds fall within the | | | | disclosure on risks assumed and positions taken, and |
| definition of an "investment company," hedge funds | | | | the investor often has direct access to the fund |
| often elect to operate with exemptions from the | | | | manager. A byproduct of this privacy is that there |
| registration requirements by selling only to "qualified | | | | are no official hedge fund statistics. |
| purchasers" or "accredited investors." Hedge funds | | | | Institutional Investor and Trader Monthly magazine |
| are also only sold via private placement and cannot | | | | annually ranks top-earning hedge fund managers. |
| be offered or advertised to the general public. So the | | | | Hedge funds are often targets of criticism. Their |
| funds trade a smaller pool of investors for fewer | | | | secrecy and lack of regulation have led to all kinds of |
| government restrictions. | | | | allegations of dodgy dealings. The size of the assets |
| While hedging is the practice of attempting to reduce | | | | held in these funds has also led to allegations that |
| risk, the goal of most hedge funds is to maximize | | | | these funds have adversely affected bond markets |
| return on investment. The first hedge funds that | | | | on different occasions. US regulators have tried to |
| appeared in the 1950s tried to hedge against the | | | | impose restrictions on these funds but there |
| downside risk of a bear market with their ability to | | | | attempts have been thwarted by the courts and the |
| short the market. Today, hedge funds use dozens of | | | | complexities of the funds and their offshore locations |
| different strategies, including speculative investments. | | | | have created a regulatory nightmare for the SEC. |
| In fact, in many cases these funds can carry more | | | | Some writers have concluded that hedge funds have |
| risk than the overall market. | | | | evolved into little more than exclusive, high-fee |
| The hedge fund manager is the general partner or | | | | mutual funds. Warren Buffett has little time for them |
| manager and the investors are the limited partners or | | | | either pointing out that mangers are rewarded for |
| members respectively. The manager generally makes | | | | high variability, rather than high long-term returns. |