A hedge fund is an investment partnership. It is the marriage of a professional fund manager. This manager is called the general partner. The investors are called the limited partners. These limited partners who invest their money together into the fund.
The use of hedge funds in personal financial groups grown since the start of the 21st century. The limited partners contribute their funding for the assets and the general partner manages it according to the strategy of a fund. A purpose of hedge fund is to maximize investor returns and to eliminate risk. If this structure and objectives of the hedge fund sound a lot like those of mutual funds, then that is basically where the similarities end. Hedge funds are generally considered to be more violent, risky and exclusive than that of mutual funds
Aim of Hedge Fund:
Hedge funds make money whether the market value goes up or down. So, a hedge fund management team resembles traders more than typical investors. Some mutual funds employ these types of techniques and not all mutual funds engage in actual hedging.
Characteristics of Hedge Fund:
Fee Structure: Hedge funds charge both an expense ratio and a performance fee. The most common fee structure is “Two and Twenty”. It is a 2% asset management fee Then a 20% change of any gains generated.
Often employ leverage: Hedge funds use leverage or borrowed money to increase their returns. It gives them too much investment risks.
Wider investment latitude: An investment of hedge fund is only limited by its order. You can invest hedge fund in anything. Like land, real estate, products, currencies and other assets.
Only open to “accredited” or qualified investors: Investors in hedge funds have to fulfill certain requirements. Generally, a net worth exceeding $1 million.
Types of Hedge Funds
Hedge funds can follow a varying degree of strategies including macro, fairness, relative value, distressed securities and involvement. A macro hedge fund invests in stocks, bonds and currencies in hopes of profiting from changes in macroeconomic variables such as global interest rates and economic policies of country. An equity hedge fund may be global or may be country-specific, investing in eye-catching stocks while hedging against downturns in equity markets by shorting overrated stocks. A relative-value hedge fund takes advantage of price or spread inadequacies. Other hedge fund strategies include violent growth, income, developed markets, value and short selling.
Another popular approach is the “fund of funds” approach in which a hedge fund mixes and matches other hedge funds and other collective investment vehicles. This combination of different strategies and asset classes aims to provide a more stable long-term investment return than those of the individual funds. Returns, risk and instability can be controlled by the mix of basic approaches and funds.
Notable hedge funds include today the Paulson Funds, a group of many hedge funds founded by John Paulson. Paulson became famous after his fund gained billions from gaming against advances back in 2008. Paulson has other specific hedge funds, including one that invests in gold.