Many people are unaware of the term Hedge Fund because general public dont deal with hedge fund. Hedge Fund
indicate a private investment company that operates under the 1933 Securities Act and 1940 Investment Company Act.
Investors prefer to define hedge fund as alternative investment vehicle. Hedge funds cater to the need of
sophisticated private investors.
A hedge fund works just like a limited partnership program. In a hedge fund there is a general partner and a few
limited partners. The general partner is held responsible for the funds day-to-day operation as well as all the
investment activities. The limited partners on the other hand are not responsible for the way the fund operates but
they are the investors who supply capital for the fund. They dont take part in the trading. They have limited
liability whereas the general partner is liable for all the activities of the partnership. The general partner
pulls the capital invested by the limited partners. He then plans the investment strategy and acts accordingly.
There is no public offering in such funds. Hence hedge funds are often known as Non-Public Offerings.
Therefore hedge funds can not opt for general advertising. Hedge Funds need to secure investors through
consultants, investment advisors, brokers, registered representatives or through word of mouth promotion. In most
cases qualified purchasers or accredited investors invest in Hedge Funds. According to the Federal Securities
laws accredited investors or qualified purchasers are defined in terms a minimum income or asset threshold that
they need to meet in order to qualify to invest in Hedge Funds. So it is important for the fund manager to check
the background of an investor and gather some information about the investor. The fund manager will have to make
sure that the investor meets the minimum asset threshold.
Usually a Hedge Fund is consisted of nearly 100 limited partners and the fund should comply with certain safe
harbor provisions. However the investment manager can undertake greater risks as an unregulated entity. When the
manager takes greater risks the investors are exposed to both substantial profit and loss.
The investment manager gets a performance fee from the hedge fund. The performance fee of the general partner
can range from 20% to 40% depending on the investment strategy implemented by the hedge fund manager. Other than
the performance fee hedge funds also include a management fee of 1% or 2% of all the income or assets under
management.
There are two types of hedge fund in New York the small boutique styled hedge funds and the worldwide hedge
funds operated by experts.
New York Hedge Funds particular
niche is dictated by the general partners experience, expertise and ability to identify the investment
opportunities. The boutique styled hedge funds especially relies on the investor managers skill and knowledge.
The investment manager can focus on a particular economic sector. A hedge fund can follow different styles such
as Market Neutral Style, Value style, Emerging Markets style, Trading style etc. The manager of the fund
participates in profit as well as loss with the limited investors.
