What is a Hedge Fund?

A Hedge Fund may be described as a pool of private capital used to leverage an investment portfolio structured as a Limited Partnership.  The General Partner (Investment Fund Manager) generally should have the sophisticated portfolio management practices of a seasoned and disciplined trading professional; The Limited Partners (capital investors) are generally high net-worth individuals and institutions, and function as silent partners.

Unlike with Mutual Funds, the General Partner's compensation is largely incentive-based depending upon performance, productivity & fund returns.  Most General Partners usually have their own money invested in the fund.  The Hedge Fund is generally unencumbered by archaic regulatory (Securities Act of 1933, Investment Company Act of 1940, etc.) procedures, and hence may have restricted liquidity, as they cannot be sold (or bought) in the open market. However things may change, as in recent years, 2004-2007, the SEC has been contemplating changing the rules and regulating this multi-trillion dollar industry. It has started with the idea of a voluntary registration, specifically of funds with assets over $25MM.

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How to Start and Manage a Hedge Fund

CONTENTS:

$       General Information & Structure
$       Limitation of Participation
$       Strategies & Goals of the Fund
$       Reporting & Web Access
$       Minimum Investment ($)
$       Minimum Lock-In Period (Yrs)
$       Tax Considerations
$       Administrative Fee
$       Performance Fee (Profit Participation)
$       Hurdle Rate (Thresholds)
$       Suitability and Benefits
$       Compare Funds
$       MAST Partners

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A Hedge Fund is generally a Limited Partnership structure allowing the pooling of "private" assets, but is not registered with the Securities and Exchange Commission (SEC) under the 1933 Securities Act (1934 amended) or under the Investment Companies Act of 1940 (like Mutual funds). Hence, a very important part of the structure - a hedge fund generally cannot be sold (or bought) in the open market, thereby limiting liquidity.

This obviously limits participation to the wealthier populus; the theory (not always true) being that wealthy individuals can better understand and manage risk. Though the structure is a partnership, investors are limited partners (silent) where participation is limited to subscription and profits (or losses) and there is no liability for the actual company. The structure is managed unilaterally by the general partner, whose rules and methods, as itemized in the partnership agreement, are absolute.
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Hedge Funds may employ various strategies to increase and sustain performance gains. These strategies include Short-selling, Arbitrage, Market Neutral, Special Situations, IPO, M&A, Liquidation & Bankruptcy, Hybrid, Multi-Strategy, Income, Global, Macro, Specialized, Growth, Options & other Derivatives, etc.  Their goals can also be as diverse including High Risk, Capital Appreciation, Capital Preservation, Income, etc.
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Most Hedge Funds report on an annual basis and use an independent accountant audit.  Some may send semi-annual unaudited statements, or even quarterly.  Web access to performance and other information has become more prevalent in recent times.
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The minimum investment is generally around $250,000 to $1,000,000 with sometimes a $100,000 entry point.
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A minimum lock-in period (no withdrawals expected) of about 3 years, ranging to about 5 years, with most being around 36 months.
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The Hedge fund (the limited partnership) itself is not taxed, but the profits flow through to the partners.  Partners generally get a K-1 to file along with their annual 1040 filing with the IRS.
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The administrative fee typically ranges from 1% - 2% to as much as 5%.
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Profit participation (performance fee) - where the general partner gets part of the profits - range from 20% - 25% to as high as 40%.
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The above Performance Fee usually occurs with a threshold, where if the fund fails to perform past a Hurdle Rate then no profit is reallocated to the general partner. The Hurdle Rate, if used, is generally between 0% to about 5%.  Some funds also use a High Water Mark: which is the highest net asset value previously attained at the end of any prior fiscal period.  The Performance Fee becomes due after the fund value has exceeded this high-water mark.
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Hedge Funds are not suitable for every portfolio. However, with a good Manager, a hedge fund can often have lower risk than Mutual Funds while sustaining steady, market beating returns. Unfortunately, while the hedge fund index has performed rather well in the past decade, not all hedge funds are safe or secure or even well-performing funds.  Capital availability is also an issue, as not everyone can afford the high capital requirements to entry into the Hedge Fund world.

Hedge Funds can benefit a portfolio by reducing volatility and risk while simultaneously increasing returns, as many hedge funds have the ability to generate positive returns in both rising and falling equity and bond markets.  Most importantly, Hedge funds may provide an ideal long-term investment solution for your portfolio, eliminating the need to correctly time entry and exit from markets.
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Hedge Fund Comparison In a Nutshell: Contact us for more information.

Hedge Funds Vs. Mutual Funds (Open End)

Comparison with Mutual Funds: See why we are better!

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MASTPartners has significantly lowered the entry point for new Hedge Fund Managers to get started. The usual overhead of starting a hedge fund has also been significantly reduced, thereby allowing the new manager to get started easier and sooner. Please see our HF Setup Information.