What Is A Hedge Fund
May 9, 2007 | In: Guest's Articles
Hedge funds are investment pools where a group of investors invest in the fund for trading in securities. These pools take the form of a limited partnership with a general partner who manages the fund and several limited partners. The liability of each partner is limited to the amount invested in the partnership. His or her personal assets cannot be held liable. There are generally no restrictions on the type of security that can be traded in. Hedge funds generally follow some sort of trading and investment strategy to achieve their investment goals.
Hedge funds are not required to be registered under the US securities law since they generally accept only financially sophisticated investors and do not sell securities to the general public. This allows them to engage in sophisticated investing techniques that are not permissible in other funds. However, they are subject to anti-fraud laws.
How Does a Hedge Fund Work
A hedge fund is managed by the general partner, who is generally the person who started the fund. He or she is compensated for managing the fund in the form of incentive pay which can be to the extent of 20% of the net profits of the fund. The partner does not receive any fixed pay. Higher the profits, higher are the pay for the general partner. If there are losses, he or she does not get paid. The remaining profits are shared between the limited partners in accordance with the partnership agreement. The general partner also charges an administrative fee which normally is 1% of the fund’s net asset value at year end.
Hedge funds are not allowed to advertise. It is for this reason very little information is available about them. Hedge funds raise money through consultants or by word of mouth. Consultants are, however, the business entity that these funds rely upon the most to raise funds.
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