Hedge funds are basically derived from mutual funds. Like mutual funds spread the investors’ capital into stocks, bonds or between the two, similarly hedge funds spread the capital into various investment vehicles. The hedge funds are designed to bring profits to the investor even if the market is facing a bearish.
The section of investors investing in hedge funds is quite less as compared to the investors in forex or stock markets. The reason behind this is that hedge funds require a large sum of capital to start out. And not every investor can afford this amount.
Let us look at the fees charged by the hedge fund manager to the traders. It is divided into two categories.
- Management fees: This fee is charged by hedge fund managers. It equates to 2% of the assets under management, but sometimes it may vary from 1% to 4%. Clients are asked to pay this fee on a monthly or quarterly basis depending upon their convenience.
- Performance fees: This fee is based on the performance of the assets and the profits gained by them. It is more of an incentive fee charged by the management firms to reward their employees handling client assets.
How does a hedge fund manager strategize the asset distribution?
- Event-based investing: This kind of investing lays its foundation on the ‘event-driven’ funds, which on the basis of long or short positions generate profits based on certain events.
- Arbitrage: Arbitrage literally means the profits gained by the simultaneous purchase and sale of a particular (or a group of) securities, assets, commodities, etc in different markets from and the profits gained are in unequal prices. It is considered a low-risk strategy.