Coming up with an actual definition of a hedge fund, admittedly, can be challenging. Initially, hedge funds would sell short the stock market, thus providing a "hedge" against any stock market declines. Today the term is applied more broadly to any type of private investment partnership. All over the world, there are thousands of hedge funds in existence. All with a common goal in mind, which is to make more money faster - they would go about this goal by using multiple investment strategies or sources. Compared to investments made by mutual funds, the strategies employed by hedge funds would usually be more aggressive.
In other words, a hedge fund would be a private investment fund that distinguishes itself through the different investment sources utilized. All the minutiae in handling the fund, from trading activity to the choice of different investments would be handled by the general partner. The investor, on the other hand (also known as limited partner, or partners) would invest most of the money and profit accordingly from the fund. If these investments garner a high return rate, then the general manager of the fund would give out a large incentive bonus and charge a nominal management fee.
There are several differences between mutual fund and hedge fund, even as the above example is very similar to how a mutual fund works.
As mutual funds are under the governance of mutual fund or investment companies, they are subject to myriad regulations. There are not that many restrictions for hedge funds, in comparison, as they are privately operated.
Mutual fund companies invest their client's money, while hedge funds invest their client's money and their own money in the underlying investments.
Hedge funds charge a performance bonus: usually 20 percent of all the gains above a certain hurdle rate, which is in line with equity market returns. Even during the toughest of times, there have been reports of hedge funds generating annual rates of return exceeding 50 percent, which is indeed quite impressive.
Again, mutual funds are subject to many stringent requirements and policies, and this may include, but is not limited to short selling, investing in commodities, investing in offshoots of other products or unfair use of leverage. However, hedge funds allow much more freedom - you can invest in whatever way suits you.
The ambiguity and mystery behind hedge funds is largely because they are not allowed to solicit investments. And these can be good investments, as many hedge funds have grown significantly in the last five years. Let it be known, though, that not all hedge funds have been that successful, as a lot of them, in fact, disappeared from the face of the earth for one reason or another.
In other words, a hedge fund would be a private investment fund that distinguishes itself through the different investment sources utilized. All the minutiae in handling the fund, from trading activity to the choice of different investments would be handled by the general partner. The investor, on the other hand (also known as limited partner, or partners) would invest most of the money and profit accordingly from the fund. If these investments garner a high return rate, then the general manager of the fund would give out a large incentive bonus and charge a nominal management fee.
There are several differences between mutual fund and hedge fund, even as the above example is very similar to how a mutual fund works.
As mutual funds are under the governance of mutual fund or investment companies, they are subject to myriad regulations. There are not that many restrictions for hedge funds, in comparison, as they are privately operated.
Mutual fund companies invest their client's money, while hedge funds invest their client's money and their own money in the underlying investments.
Hedge funds charge a performance bonus: usually 20 percent of all the gains above a certain hurdle rate, which is in line with equity market returns. Even during the toughest of times, there have been reports of hedge funds generating annual rates of return exceeding 50 percent, which is indeed quite impressive.
Again, mutual funds are subject to many stringent requirements and policies, and this may include, but is not limited to short selling, investing in commodities, investing in offshoots of other products or unfair use of leverage. However, hedge funds allow much more freedom - you can invest in whatever way suits you.
The ambiguity and mystery behind hedge funds is largely because they are not allowed to solicit investments. And these can be good investments, as many hedge funds have grown significantly in the last five years. Let it be known, though, that not all hedge funds have been that successful, as a lot of them, in fact, disappeared from the face of the earth for one reason or another.
No comments:
Post a Comment