Monday, 12 November 2012

A Basic Introduction to Hedge Funds

A Paulson hedge fund pools money from several individuals or entities and invests the money into various financial instruments and vehicles. Additionally, only specific types of investors are allowed to participate in the fund. Typically, investors must be "high-net worth individuals" as defined by the SEC. Hedge funds are similar to mutual funds in that multiple investors pool funds to invest as a single portfolio; however, hedge funds have more flexibility in their investment choices, such as taking short positions, leveraging their positions, trading complex derivative instruments, and investing in side pockets.

Fund managers earn revenue by collecting a management fee and a performance fee. Management fees range from 1%-4% annually of funds invested; performance fees range from 10%-50% of the funds annual return. Most funds employ the high-water mark rule which states that performance fees are only collected on net profits after losses from previous years have been subtracted.


 Investment Strategies:
Hedge funds vary considerably and employ a variety of investment strategies. Some of the more notable strategies include global macro, arbitrage, emerging markets, distressed securities, equity long/short, and fund of funds.

Hedge funds are typically structured as limited partnerships with the fund manager as the general partner and each investor as the limited partners. Below the manager are administrators and junior analysts who support the operation of the fund and the analysis of investment choices. Additionally, people may be employed to market the fund to potential investors.

Because hedge funds are closed to unqualified investors, fewer regulation designed to protect investors apply. For example, they enjoy more lenient reporting standards. Nonetheless, they must follow strict guidelines set by the SEC and various acts to comply with regulations. One significant area of regulation is in regard to marketing by the fund. The SEC prohibits hedge funds from openly advertising investment opportunities and requires specific disclosures on all marketing material.

 Jobs in the Industry:
Most hedge funds like in the United States are located on the East Coast. Many are headquartered in New York City or Greenwich, CT. Chicago, IL is another big center. Because of the relatively small size in terms of employees, they usually do not have set recruiting schedules for recent graduates and may outsource much of their hiring. Networking and persistence provide the best opportunities for employment. Now you know the most basic aspects. Keep posted for more in depth articles to come. For more information related to investments, check out for definitions and learning material.

 Largest hedge funds

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