Monday, May 23, 2022

Hedge Fund

             

  1. hedge fund is a pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex tradingportfolio-construction and risk management techniques in an attempt to improve performance, such as short sellingleverage, and derivatives.
  1. Financial regulators generally restrict hedge fund marketing except to institutional investorshigh net worth individuals and others who are considered sufficiently sophisticated.( Accredited investor)
  1. To qualify as an accredited investor, a high net-worth individual must have:
  • A net worth, or joint net worth with their spouse, that exceeds $1 million at the time of the purchase. The net worth calculation excludes the value of their primary residence.
  • A yearly income of $200,000 or higher in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same.
  1. How does hedge fund work?
  • Hedge funds are financial partnerships that use pooled funds and employ different strategies to earn active returns for their investors. 
  1. Hedge Funds’ Unique Structure
  • Unique to the investment community, hedge funds are partnerships formed between fund managers and investors.
  • Typically hedge fund managers invest a significant amount of personal capital – in some cases in excess of 50 percent of the total assets in the fund – aligning their interests with that of their investors.

6. What is the role of an Investment Manager?

  • The investment manager makes daily investment decisions for the fund,

choosing where and when to allocate investment capital. The manager also manages portfolio risk.

  • Investment managers may be either direct employees of the hedge fund

management firm or employees of another firm hired by the management firm to provide investment advice, pursuant to a sub-advisory agreement.

7. Team Structure- The actual terms of partnership vary according to the fund; however, they are usually based on a few factors.

Subscriptions and Redemptions:

  • A subscription is when the investor applies to join a particular fund. Subscription minimums vary from fund to fund.
  • A redemption is when the investor withdraws part or all their investment from a fund. 
  • Unlike registered investment companies, hedge funds are not required to have daily liquidity. Some hedge funds offer subscriptions and redemptions monthly, while others accept them only quarterly or annually.

Lockups:

  • A lock-up is the time period that an initial investment cannot be redeemed from the fund. The length of time varies based on the fund.
  • The average lock-up period for a U.S. hedge fund is eight months*. In certain cases, it could be a “hard lock”, which prevents the investor from withdrawing funds for the full time period, while in other cases, an investor can pay a penalty and withdraw funds early.

 

8.  Fee Structure

Hedge funds charge both an expense ratio and a performance fee. The common fee structure is known as two and twenty (2 and 20)—a 2% asset management fee and a 20% cut of generated gains.

        Difference between Hedge fund & Mutual Fund 

Mutual Fund Hedge Fund 
Don’t take share from the profitTake ~20% performance fee from the profit
Are available to the general publicAre available only to high-net-worth and sophisticated investors.
Charge a management fee (normally 1–2%Charge management fee (normally 2%) plus performance fee.
Can’t make high risk investment Can make high-risk investments
CA Divya Thakkarhttps://www.financeshadow.com
Chartered accountant | IIM Bangalore 7+years of experience in Consultancy, Investment Banking, Ecommerce & IT Industry. Expert in IFRS, USGAAP, INDAS & US Regulatory requirement. Currently working with Deloitte Touche & Company in Risk ,Finance & Control advisory. Worked in Companies like Barclays Bank, HCL Technologies Ltd & BazaarCart.

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