What is a Hedge Fund?
You’ve undoubtedly heard the term “hedge fund” before. Most people have, traders and non-traders alike. However, relatively few actually know what a hedge fund is, and fewer still know how hedge funds work. With this comprehensive infographic, we hope to take some of the mystery out of hedge funds to give you a better understanding about what they are, how they work, and what makes them such an enticing investment opportunity for select investors.
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The basics. Basically, a hedge fund is a limited partnership. It’s a financial relationship which exists between a fund manager (also known as the “general partner”) and the investors (also known as the “limited partners”).
The fund manager is steering the ship that is the hedge fund, creating a strategy and managing the funds, while the investors are the ones who contribute the money.
Ideally, both parties benefit from this relationship. The investors benefit from having a fund manager who can take their investment and earn them returns. The fund manager is typically paid by a fee schedule that is referred to as “Two and Twenty”, which means that they get a 2 percent asset management fee, and then 20 percent of any gains generated through their work.
Hedge fund strategies. There are a number of different hedge fund strategies. In the infographic, some of the most common strategies are broken down and explained in detail: equity, event driven, macro, relative value, and fund of funds.
What does a hedge fund invest in? A hedge fund can invest in just about anything. Some common investments might include land, real estate, currencies, derivatives, and stocks, though they are not limited to these categories.
Who can invest in a hedge fund? Hedge funds have a reputation for being very white collar, and there’s good reason why. Not just anyone can be a hedge fund investor. To invest, you either must have a net worth of over $1 million (excluding a primary residence), or you must have made over $200,000 for the past two consecutive years.
The pros and cons of hedge funds. Like any type of investment, there are pros and cons to hedge funds (for instance, the fact that many funds eventually must close). In the infographic, some of the biggest advantages and disadvantages of hedge fund investing are laid out in clear, easy to understand terms.
Are you interested in hedge fund investing?