What is a hedge fund investment?
A hedge fund investment is a partnership where investors pool money and reinvest it into more risky and complicated financial instruments. Investors rely on the fund management expertise to eliminate risks, maximize returns and grow their wealth. The fund manager (in the partnership) is the general partner. The investors (in the partnership) are the limited partners. Each hedge fund investment operates under a unique strategy. The strategy is managed by the general partner.
The hedge fund manager’s role
A hedge fund investment contract outlines what the fund manager can invest in. However, there is no limitation on what they can invest in. A hurdle rate is required for hedge fund managers to get paid. The investors take all the profits. This continues until the minimum return rate is reached. This allows the fund manager to take a portion of the profits. Many hedge funds operate under the 2 and 20 rule, stating that there is no hurdle rate. The manager receives 2% of the assets and 20% of the profits.
Hedge fund benefits
This is based on the types of financial instruments they invest in. This is also based on how managers are paid. As well as lack of financial regulation. Many investors are attracted by hedge funds because it is unlike mutual funds, where they pay fees regardless of the performance. The compensation structure in hedge funds motivates fund managers to achieve results beyond market returns.
Hedge fund risks
Although the structure of the hedge fund may seem like a mutual fund and more rewarding, hedge funds are aggressive.This is because they take higher risks, and only the wealthy can invest in them. However, a hedge fund investment has a broad portfolio. To some degree this allows diversification of assets classes . This way, investors can reduce the risk of loss. Since hedge funds can also use leveraged assets in the investment strategies, they can also rely on trade margins to optimize their purchasing power when buying securities.