How does a hedge fund make money?
March 27, 2020
“Hedge fund makes money by charging a Management Fee and a Performance Fee. While these fees differ by fund, they typically run 2% and 20% of assets under management.
Management Fees: This fee is calculated as a percentage of assets under management. Typically this equates to 2% but can range from 1% to 4% depending on the fund. These fees are generally paid monthly or quarterly and help pay overhead and daily expenses of running the hedge fund.
Performance Fees: This fee is calculated as a percentage of the funds profits. This is an incentive fee: if the fund makes money they will get paid, if not they won’t. This incentive fee motives the fund to generate excess returns. These fees are generally used to pay employee bonuses and reward a hard working staff.
A high water mark helps to protect investors in a scenario where the fund starts to lose money. This is a loss carryfoward provision that will only be revered if the fund makes back those losses
Assuming a Hedge Fund is $100 million charges standard 2/20% fees and generates 10% annual returns, how much money will the fund make? The fund would return $4 million in annual fees: Management fee of $2 million plus a $2 million Performance fee ($100mn x 10% x 20%).”
What do hedge funds invest in?
” A hedge fund can basically invest in anything—land, real estate, stocks, derivatives, and currencies. Mutual funds, by contrast, have to basically stick to stocks or bonds and are usually long-only. They often employ leverage: Hedge funds will often use borrowed money to amplify their returns”
Are hedge funds high risk?
” As noted, hedge funds very often use speculative investment and trading strategies. Many hedge funds are honestly managed, and balance a high risk of capital loss with a high potential for capital growth. The risks hedge funds incur, however, can wipe out your entire investment.”