These are investment which is open only to very few private investors who will be ready to invest a very huge amount. These types of investments are usually highly profitable. The hedge funds are usually unregulated because only the sophisticated investor invests in these types of investments. Hedge fund investments are mainly based on speculative kind of investment. The risk involved in this type of investment is high, but high end technologies are being used to predict this risk and invest safely. There are some rules to be followed for an investor to be able to invest in hedge funds they are,
They must have minimum turnover more than 1 million $ every month.
He/She must have a good knowledge about investments.
Hedge is almost equivalent to mutual fund, basic difference being it is for rich alone and flexibility is more in case of hedge fund rather than mutual fund. Shorting is the specialty of hedge investment. The net asset value of hedge fund runs in billion of dollars. Hedge funds are usually managed by hedge fund managers. They get two type of fees they are,
Management fee is a fee which the investor must give to the hedge fund manager in order to manage their funds. It is usually calculated as the percentage of the net value of the asset that the manager manages. This fee usually covers the management cost associated with the hedge fund, employee salary.
Performance fee is a fee which the hedge fund managers get based on the performance of the portfolio that the manager is managing. It is usually in the form of percentage in the profit that the portfolio yields. It can be termed as a incentive that the manager gets for the good performance of his portfolio. It is usually given as bonuses to the employees. In normal business environment it is usually 20% of the profit from the hedge investment.
Hurdle rate is a process in which the hedge fund manager never gets any fee until the portfolio crosses a minimum profit level called as benchmark rate.
Withdrawal fees are the fee that the hedge fund manager charges from the investor when the investor takes back the investment in the middle of the investment period.
Hedge funds are primarily used by the big investor as a back up for some huge loss in the main business. They will use the money from the hedge fund to control and rectify the damage that they incur in their main business.