HEDGE FUNDING-basics pt-1

Breaking down the term at first, the word ‘hedge’ means a way of protecting oneself against a financial loss/ adversity and the term ‘fund’ is a sum of money set aside for a particular purpose. Now putting these two terms together, a hedge fund is said to be a pool money invested in a diverse range of securities to generate returns with higher risk.

These funds use leverage, that is, in order to maximise their funds they use borrowed money which is also a reason of why they’re counted in alternative investments.

RESTRICTIONS

The fact that separates it from other funds is that it is usually invested by large institutional investors( usually wealthy individuals, families and banks) which is because they’re not allowed to be marketed unlike the other funds because of the high amount of risk they carry.

TWO AND TWENTY

2 and 20 is a hedge fund term which means 2% management fee and a 20% performance fee. An investment manager is given a 2% management fee and the 20% waive is given to the same manager off profits in case of exceptional performance beyond a certain limited, usually called the threshold.

The common threshold limit is 8% To some investors this two and twenty is really costly because the ROI which is consistently high in big hedge funds. In short, when a manager is given profit according to what he achieves, he works hard not only for the investors, but for himself too.

How are mutual funds different from hedge funds?

They may sound the same as mutual funds are companies which pool up money and invest the money into different securities which sounds the same as hedge funds. But, hedge funds are investments with big risks and higher rewards, limited to a number of people. Secondly, theres is a limit on the amount of capital that can be invested in mutual funds, unlike hedge funds.Moreover, in the share of profit only about 1-2% is deducted for the managerial fee in mutual funds. And while in the case of hedge funds, there’s the two and twenty phenomenon.