| "What are hedge funds, exactly?" You have | | | | regardless of the current marketplace. Many |
| probably asked yourself this question at least | | | | h-funds are designed to reduce risks; hence, the |
| once in your life. Sure, we read about them in the | | | | word 'hedging'. Typically, seeing a higher return on |
| newspaper and/or online. We hear about them on | | | | your investment usually means that you're going |
| television and how some people are making | | | | to see greater risks. However, many times, |
| millions of dollars by managing them. But what are | | | | h-fund managers are able to reduce the |
| they? What do they consist of? Are they just | | | | associated risks without cutting into the |
| another scam or can you really build a consistent, | | | | investment capital. For example, said manager |
| livable income from them? | | | | may have ways of avoiding/reducing risks while |
| By definition, a hedge fund is a portfolio of | | | | taking on other investors/investments that are |
| aggressive investments that utilize extremely | | | | expected to see a good return. A good example |
| advanced investment strategies such as long, | | | | of this is when the h-fund manager borrows |
| short, leveraged and derivative positions in all | | | | money in an effort to increase his/her return on |
| markets - in an effort to generate high returns. | | | | a low-risk investment. This process is known as |
| -Still confused? That's because the | | | | leveraging. It is important to know how h-fund |
| aforementioned explanation could mean just about | | | | managers make their money if you are interested |
| anything. | | | | in investing in h-funds. |
| If we do a little more digging, we will find that | | | | There are always going to be risks associated |
| most hedge fund managers today, take on the | | | | with these types of investments - no matter |
| role of risk managers, investment bankers, | | | | how you see it. This is the unfortunate truth. It's |
| venture capitalists and currency speculators. | | | | not a simple task to eliminate risks while gaining a |
| That being said, I think we can safely conclude | | | | return on any investment. This is the challenge |
| that the term 'hedge fund' (or h-fund), and the | | | | that all hedge fund managers face. This is also |
| people that manage them, cannot be easily | | | | why h-fund managers are able to make great |
| defined - at least, not to the point that the idea | | | | money if they are successful and/or have a |
| can be quickly communicated. However, if we | | | | successful track record. |
| were to sum things up in a more generalized way | | | | Hedge fund managers typically see a |
| that is easier to understand, we could simply say | | | | management fee and a performance fee (i.e. |
| that a hedge fund manager, in the investment | | | | incentive fee) from any/all funds that he/she |
| world, is just another 'consultant'. | | | | manages. The management fees are usually |
| You may find that, some of the more intelligent | | | | around 2% of the fund's net asset value |
| managers on Wall Street have decided to manage | | | | (annually). The performance fees can be as much |
| their own h-funds. Of course, that makes sense | | | | as 20% of the fund's profit. And considering the |
| because by managing your own h-fund, you have | | | | fact that there are many h-funds that are |
| the freedom to manage the money as you see | | | | currently being backed by multimillion dollar |
| fit while making money for yourself and for your | | | | investments, you can probably understand why |
| investors. So, it's a win-win situation. | | | | hedge fund management can be (and is) so |
| Many times, h-funds are managed in such a way | | | | lucrative. Which brings me to my next question |
| that they see a consistent level of return - | | | | -"how can I get started"? |