Hedge funds are investment partnerships that enable investors and professional fund managers to put their money together into the fund and work out different strategies to help investors earn returns.
The purpose of hedge funds is to maximize returns and minimize risks. Compared with mutual funds, hedge funds are more risky, exclusive, and aggressive. In hedge funds, investors are supposed to contribute funding for assets while managers are responsible for managing the assets based on the strategies.
People intended to invest in hedge funds should meet some criteria. Typically, a hedge fund investor is supposed to have a net worth over $1 million or an annual income of more than $200,000 for two previous years.
While mutual funds are often confined in bonds and stocks, people with hedge funds can invest in various assets, including real estate, currencies, land, derivatives, and so on.
A hedge fund often uses borrowed money or leverage to increase the returns. This, however, may lead to more financial risks and even blow-ups.
Hedge funds require a performance fee as well as an expense ratio. There is a common but controversial fee structure called “two and twenty” in hedge funds. This means that the manager of the hedge fund can receive 2% of the assets as the management fee plus 20% of the profits per year. The trick is that even if the manager loses money, he or she can still obtain a 2% fee.
Although hedge funds inevitably involve many risks, it is still a good choice to have your assets managed by top investment managers. Chances are that with hedge funds’ great flexibility, those gifted managers will eventually bring you impressive long-term profits.