About Hedge Funds
Hedge Funds Strategies
Hedge Funds Facts
Hedge Fund Fees
Fund of Funds
Invest in Hedge Funds
Top Hedge Funds
Top Funds of Funds
Hedge Fund News
Hedge Fund Reports
Hedge Funds Programmes
Hedge Funds Launch
Regulation of Hedge Funds
Generally, a hedge fund is a lightly regulated private investment
fund sometimes characterized by unconventional strategies (e.g.,
strategies other than investing long only in
bonds, equities or
money markets). They are primarily organized as limited partnerships,
and previously were often simply called "limited partnerships" and were
grouped with other similar partnerships such as those that invested in oil
The term hedge fund dates back to the first such fund founded
Alfred Winslow Jones in
1949. Jones' innovation was to sell short some
stocks while buying others, thus some of the
market risk was hedged. While most of today's
hedge funds still trade stocks both long and short, many do not trade
stocks at all.
For U.S.-based managers and investors, hedge funds are simply structured
as limited partnerships or limited liability companies. The hedge fund
manager is the general partner or manager and the investors are the
limited partners or members respectively. The funds are pooled together in
the partnership or company and the general partner or manager makes all
the investment decisions based on the strategy it outlined in the offering
In return for managing the investors' funds, the hedge fund manager will
receive a management fee and a performance or incentive fee. The
management fee is computed as a percentage of assets under management, and
the incentive fee is computed as a percentage of the fund's profits.
A "high water mark" may be specified, under which the manager does not
receive incentive fees unless the value of the fund exceeds the highest
value it has achieved. The "high water mark" is intended to encourage fund
managers to recoup losses, but is viewed by critics as encouraging laggard
funds to close, to the detriment of investors.
The fee structures of hedge funds vary, but the annual management fee is
typically 20% of the profits of the fund plus 2% of
assets under management. Certain highly regarded managers demand
higher fees. In particular,
SAC Capital Partners charges a 50% incentive fee (but no management
Renaissance Technologies Corp. charged a 5% management fee and a 44%
incentive fee in its flagship Medallion Fund before returning all
investors' capital and running solely on its employees' money.
Fund of Funds
provide easier managed, access to the world of hedge funds.
The typical hedge fund management firm includes both the domestic U.S.
hedge fund and the offshore hedge fund. This allows hedge fund managers to
attract capital from all over the world. Both funds will trade 'Pari
passu' based on the strategy outlined in the offering documents
Hedge Fund Facts:
- Estimated to be a $1.1 trillion industry and growing every year,
with approximately 9000 active hedge funds.
- Includes a variety of investment strategies, some of which use
leverage and derivatives while others are more conservative and employ
little or no leverage. Many hedge fund strategies seek to reduce market
risk specifically by shorting equities or derivatives.
- Most hedge funds are highly specialized, relying on the specific
expertise of the manager or management team.
- Performance of many hedge fund strategies, particularly relative
value strategies, is not dependent on the direction of the bond or
equity markets -- unlike conventional equity or mutual funds (unit
trusts), which are generally 100% exposed to market risk.
hedge fund strategies, particularly arbitrage strategies,
are limited as to how much capital they can successfully employ before
returns diminish. As a result, many successful hedge fund managers limit
the amount of capital they will accept.
- Hedge Fund returns over a sustained period of time have outperformed
standard equity and bond indexes with less volatility and less risk of
loss than equities.
Investing in hedge funds tends to be favored by more sophisticated
investors, including many Swiss and other private banks, who have lived
through, and understand the consequences of, major stock market
corrections. Many endowments and pension funds allocate assets to hedge
2001, Dion Friedland, Chairman, Magnum Funds. Permission is granted to
reprint information in this article provided credit for the information is
Dion Friedland and