Decoding Hedge Funds
In the world of finance, there are certain terms
that get thrown around frequently, and often people within the industry just
assume that everyone knows what they mean. In fact, sometimes people even
assume that they themselves understand what it means, but when they actually
stop and think about it, they really don’t know at all. One of these terms is
the infamous 'hedge fund'.
A hedge fund is largely an investment pool contributed
by a limited range of partners (investors) and operated by an expert manager
with specific goals in mind - primarily to maximise returns and minimise risk.
And, owing to their nature, hedge funds are usually solely open to qualified
investors, though not exclusively - establishments, investors with connections
to the manager, or perhaps the managers themselves also often invest.
the hedge fund is operated by a manager who invests
the money into totally different assets to attain the fund’s goals. Different
forms of hedge funds have different goals (like funds that invest in "long
only" equities - solely buying ordinary shares and not selling short; or
ones engaged only in private equity). However a standard goal for pretty much
all hedge funds is their aim at market direction neutrality - meaning they try
to make money despite the market going
up or down. So, hedge fund managers are typically like traders.
How do they work ?
The basic structure of a hedge fund is an investment
or partnership pool where a fund manager invests in several securities and
equities that match up with the fund's goals. Hedge fund managers preach a
method to investors, and the investors expect the manager to stick to said
strategy. This strategy can involve being a hedge fund that's specifically long
or short on all their stocks, or a hedge fund that makes a definite sort of
investment that may vary from common shares to patents.
However, one amongst the largest distinguishers
concerning hedge funds is that they're nearly always solely accessible to
"accredited investors" - or investors with a particular a definite of
capital.
Most hedge funds generally use large amounts of
leverage to maximise returns and generally invest in stocks, bonds and mutual
funds, but can also invest in real estate, currency, art, or whatever the
fund's goals match to. Most hedge funds operate on a typical "2 and
20" manager compensation scheme, which gives the hedge fund manager 2% of
the assets(fixed even if the fund suffers loss) and an incentive fee of 20% of
the profit every year.