At its most basic, a hedge fund is a partnership between a professional fund manager and investors (often referred to as limited partners). The manager and investors pool money into a fund, using different strategies to grow the fund.
While there are hundreds of strategies employed by hedge funds to generate returns for their investors, most can be grouped into four main categories: – Global macro – Directional – Event-driven – Relative value
An accredited investor must have a net worth of $1 million, not including the value of their primary home, or an annual income of $200,000 if single and $300,000 if married. A qualified purchaser designation is even more stringent. You must have at least $5 million in investable assets.
A typical hedge fund fee structure is “2 and 20”, which means they charge a 2% annual fee on the total assets under management, as well as a performance fee of 20% of the total profit.
Compared to investing index or mutual funds, hedge funds have some unique benefits and risks. Benefits: flexibility, reduced losses in market downturns, and diversification. Risks: Fees, lack of transparency, and liquidity.