{
  "id": 50076,
  "date": "2021-11-03T12:32:19",
  "date_gmt": "2021-11-03T16:32:19",
  "guid": { "rendered": "https:\/\/finance-able.com\/?p=50076" },
  "modified": "2025-12-21T16:51:43",
  "modified_gmt": "2025-12-21T21:51:43",
  "slug": "what-is-a-hedge-fund",
  "status": "publish",
  "type": "post",
  "link": "https:\/\/finance-able.com\/what-is-a-hedge-fund\/",
  "title": { "rendered": "What is a Hedge Fund? \u2013 Ultimate Guide" },
  "content": {
    "rendered": "\n<p style=\"font-size:18.5px\"><strong>&#8216;What is a Hedge Fund?&#8217;<\/strong> is a question that <strong>usually ends with more confusion than clarity<\/strong>. In this guide &#8211; <strong>written by an industry insider who worked at a multi-billion dollar Hedge Fund<\/strong> \u2013 we make it simple.&nbsp;<\/p>\n\n\n\n<p style=\"font-size:18.5px\">In this article, you will learn:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>What is a Hedge Fund?<\/strong> (History, Typical Investments, and Strategies)<\/li>\n\n\n\n<li><strong>How do Hedge Funds Work?<\/strong> (Legal Structure, Long vs Short, Fees, Gross vs Net Exposure)<\/li>\n\n\n\n<li><strong>Why are Hedge Funds considered risky?<\/strong> (Leverage, Liquidity, Derivatives)<\/li>\n\n\n\n<li><strong>How to Invest in a Hedge Fund?<\/strong> (Legal Requirements, Minimum Investment)<\/li>\n\n\n\n<li><strong>What does a Hedge Fund Manager Do? <\/strong>(Day-To-Day Role, Compensation)<\/li>\n\n\n\n<li><strong>Hedge Fund vs Private Equity and Mutual Funds<\/strong><\/li>\n<\/ul>\n\n\n\n<p class=\"yoast-reading-time__wrapper\"><span class=\"yoast-reading-time__icon\"><svg aria-hidden=\"true\" focusable=\"false\" data-icon=\"clock\" width=\"20\" height=\"20\" fill=\"none\" stroke=\"currentColor\" style=\"display:inline-block;vertical-align:-0.1em\" role=\"img\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" viewBox=\"0 0 24 24\"><path stroke-linecap=\"round\" stroke-linejoin=\"round\" stroke-width=\"2\" d=\"M12 8v4l3 3m6-3a9 9 0 11-18 0 9 9 0 0118 0z\"><\/path><\/svg><\/span><span class=\"yoast-reading-time__spacer\" style=\"display:inline-block;width:1em\"><\/span><span class=\"yoast-reading-time__descriptive-text\">Estimated reading time: <\/span><span class=\"yoast-reading-time__reading-time\">34<\/span><span class=\"yoast-reading-time__time-unit\"> minutes<\/span><\/p>\n\n\n\n<div style=\"height:5px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n\n\n<div style=\"height:50px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" id=\"h-tl-dr\" style=\"font-size:35px\"><strong>TL;DR<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-list\">\n<li>A Hedge Fund is &#8216;<strong>pooled investment vehicle<\/strong>&#8216; that invests <strong>primarily in publicly-traded securities<\/strong> to generate returns for investors.<\/li>\n\n\n\n<li>Hedge Funds are unique because they <strong>&#8216;Hedge&#8217; their portfolios<\/strong> by &#8216;<strong>Going Short<\/strong>&#8216; in addition to &#8216;<strong>Going Long<\/strong>.&#8217;<\/li>\n\n\n\n<li>Investors in Hedge Funds fund face <strong>unique risks<\/strong> to due to the use of <strong>Leverage and Derivatives<\/strong> as well as <strong>limited Liquidity<\/strong>. <\/li>\n\n\n\n<li>While Hedge Fund Managers can <strong>earn substantial sums<\/strong>, managing a fund and <strong>reaching the top of the stack is incredibly difficult<\/strong>. <\/li>\n<\/ul>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<div class=\"wp-block-columns containerwidth is-layout-flex wp-container-core-columns-is-layout-9d6595d7 wp-block-columns-is-layout-flex\">\n<div class=\"wp-block-column is-layout-flow wp-block-column-is-layout-flow\" style=\"flex-basis:100%\"><div class=\"kb-row-layout-wrap kb-row-layout-id50076_300474-87 alignnone wp-block-kadence-rowlayout\"><div class=\"kt-row-column-wrap kt-has-1-columns kt-row-layout-equal kt-tab-layout-inherit kt-mobile-layout-row kt-row-valign-top\">\n\n<div class=\"wp-block-kadence-column kadence-column50076_85faa3-5e\"><div class=\"kt-inside-inner-col\">\n<h2 class=\"wp-block-heading\" id=\"h-want-to-learn-more-about-finance\" style=\"font-size:35px\"><strong>Want To Learn More About Finance?<\/strong><\/h2>\n\n\n\n<p style=\"font-size:18px\"><strong>Check out all of our (free) deep-dive articles in our<\/strong> <a href=\"https:\/\/finance-able.com\/analyst-starter-kit\/\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Analyst Starter Kit<\/span><\/strong><\/a>:<\/p>\n\n\n<div class=\" wp-block-kadence-portfoliogrid kb-blocks-portfolio-loop-block alignnone kb-portfolio-loop50076_a83578-e5 kb-portfolio-grid-layout-carousel kt-blocks-carousel \"><div class=\" kb-portfolio-grid-layout-carousel-wrap kt-post-grid-layout-carousel-wrap kt-carousel-arrowstyle-whiteondark kt-carousel-dotstyle-dark splide kb-blocks-portfolio-img-hover-zoomout kb-blocks-portfolio-content-hover-zoomin\" data-columns-xxl=\"3\" data-columns-xl=\"3\" data-columns-md=\"3\" data-columns-sm=\"2\" data-columns-xs=\"1\" data-columns-ss=\"1\" data-slider-center-mode=\"false\" data-slider-type=\"carousel\" data-slider-anim-speed=\"400\" data-slider-scroll=\"1\" data-slider-dots=\"true\" data-slider-arrows=\"true\" data-slider-hover-pause=\"false\" data-slider-auto=\"true\" data-slider-center-mode=\"false\" data-slider-speed=\"7000\" data-show-pause-button=\"false\" data-slider-gap=\"30\" data-slider-gap-tablet=\"30\" data-slider-gap-mobile=\"30\" data-slider-gap-unit=\"px\" data-item-selector=\".kb-portfolio-masonry-item\"><div class=\"kadence-splide-slider-init splide__track\"><ul><li class=\"kb-portfolio-slider-item kb-slide-item\"><div class=\"kb-blocks-portfolio-grid-item\"><div class=\"kb-blocks-portfolio-grid-item-inner-wrap kb-feat-image-align-none\"><div class=\"kadence-portfolio-image\"><div class=\"kadence-portfolio-image-intrisic kt-image-ratio-nocrop\" style=\"padding-bottom:56.25%\"><div class=\"kadence-portfolio-image-inner-intrisic\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2023\/03\/unlevered-beta-formula-lightbulb-1024x576.png\" class=\"attachment-large size-large wp-post-image\" alt=\"An image of a lightbulb with the text Unlevered Beta Formula\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2023\/03\/unlevered-beta-formula-lightbulb-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2023\/03\/unlevered-beta-formula-lightbulb-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2023\/03\/unlevered-beta-formula-lightbulb-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2023\/03\/unlevered-beta-formula-lightbulb.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/div><\/div><\/div><div class=\"kb-portfolio-grid-item-inner\"><a href=\"https:\/\/finance-able.com\/unlevered-beta-formula\/\" aria-label=\"Unlevered Beta Formula &#8211; Ultimate Guide\" class=\"portfolio-hover-item-link\"><\/a><div class=\"kb-portfolio-overlay-color\"><\/div><div class=\"kb-portfolio-overlay-border\"><\/div><div class=\"kb-portfolio-content-item-inner\"><h3 class=\"entry-title kb-portfolio-loop-title\">Unlevered Beta Formula &#8211; Ultimate Guide<\/h3><\/div><\/div><\/div><\/div><\/li><li class=\"kb-portfolio-slider-item kb-slide-item\"><div class=\"kb-blocks-portfolio-grid-item\"><div class=\"kb-blocks-portfolio-grid-item-inner-wrap kb-feat-image-align-none\"><div class=\"kadence-portfolio-image\"><div class=\"kadence-portfolio-image-intrisic kt-image-ratio-nocrop\" style=\"padding-bottom:56.25%\"><div class=\"kadence-portfolio-image-inner-intrisic\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2023\/01\/lightbulb-purchase-price-allocation-1024x576.png\" class=\"attachment-large size-large wp-post-image\" alt=\"A lightbulb and the words Purchase Price Allocation\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2023\/01\/lightbulb-purchase-price-allocation-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2023\/01\/lightbulb-purchase-price-allocation-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2023\/01\/lightbulb-purchase-price-allocation-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2023\/01\/lightbulb-purchase-price-allocation.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/div><\/div><\/div><div class=\"kb-portfolio-grid-item-inner\"><a href=\"https:\/\/finance-able.com\/purchase-price-allocation\/\" aria-label=\"Purchase Price Allocation in 4 Steps &#8211; The Ultimate Guide\" class=\"portfolio-hover-item-link\"><\/a><div class=\"kb-portfolio-overlay-color\"><\/div><div class=\"kb-portfolio-overlay-border\"><\/div><div class=\"kb-portfolio-content-item-inner\"><h3 class=\"entry-title kb-portfolio-loop-title\">Purchase Price Allocation in 4 Steps &#8211; The Ultimate Guide<\/h3><\/div><\/div><\/div><\/div><\/li><li class=\"kb-portfolio-slider-item kb-slide-item\"><div class=\"kb-blocks-portfolio-grid-item\"><div class=\"kb-blocks-portfolio-grid-item-inner-wrap kb-feat-image-align-none\"><div class=\"kadence-portfolio-image\"><div class=\"kadence-portfolio-image-intrisic kt-image-ratio-nocrop\" style=\"padding-bottom:45.138888888889%\"><div class=\"kadence-portfolio-image-inner-intrisic\"><img loading=\"lazy\" decoding=\"async\" width=\"720\" height=\"325\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/06\/0-Walk-Me-Through-a-DCF-Definitive-Guide-Cover-1.png\" class=\"attachment-large size-large wp-post-image\" alt=\": A stick figure answering an interview question with the title text &#039;Walk Me Through an LBO&#039; below\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/06\/0-Walk-Me-Through-a-DCF-Definitive-Guide-Cover-1.png 720w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/06\/0-Walk-Me-Through-a-DCF-Definitive-Guide-Cover-1-300x135.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/06\/0-Walk-Me-Through-a-DCF-Definitive-Guide-Cover-1-400x181.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/06\/0-Walk-Me-Through-a-DCF-Definitive-Guide-Cover-1-624x282.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/06\/0-Walk-Me-Through-a-DCF-Definitive-Guide-Cover-1-50x23.png 50w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/06\/0-Walk-Me-Through-a-DCF-Definitive-Guide-Cover-1-100x45.png 100w\" sizes=\"auto, (max-width: 720px) 100vw, 720px\" \/><\/div><\/div><\/div><div class=\"kb-portfolio-grid-item-inner\"><a href=\"https:\/\/finance-able.com\/walk-me-through-a-dcf\/\" aria-label=\"Walk Me Through a DCF in 5 Steps &#8211; The Ultimate Guide\" class=\"portfolio-hover-item-link\"><\/a><div class=\"kb-portfolio-overlay-color\"><\/div><div class=\"kb-portfolio-overlay-border\"><\/div><div class=\"kb-portfolio-content-item-inner\"><h3 class=\"entry-title kb-portfolio-loop-title\">Walk Me Through a DCF in 5 Steps &#8211; The Ultimate Guide<\/h3><\/div><\/div><\/div><\/div><\/li><\/ul><\/div><div class=\"clearfix\" style=\"clear:both\"><\/div><\/div><\/div><\/div><\/div>\n\n<\/div><\/div><\/div>\n<\/div>\n\n\n\n<div style=\"height:70px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" style=\"font-size:35px\"><strong>What is a Hedge Fund?<\/strong><\/h2>\n\n\n\n<div style=\"height:30px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/stick-figure-confused-about-hedge-funds-1024x576.png\" alt=\"a stick figure sitting at a desk confused about the question \u2018What is a Hedge Fund?\u2019\" class=\"wp-image-50147\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/stick-figure-confused-about-hedge-funds-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/stick-figure-confused-about-hedge-funds-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/stick-figure-confused-about-hedge-funds-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/stick-figure-confused-about-hedge-funds-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/stick-figure-confused-about-hedge-funds-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/stick-figure-confused-about-hedge-funds.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<div style=\"height:20px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Hedge Funds can be incredibly confusing to understand. <\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\">This article will provide plain-English, illustrated explanations to <strong>help you understand everything you would want to know about Hedge Funds<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Let&#8217;s start with <strong>how do we define &#8216;Hedge Fund?&#8217;<\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\">At a very high level, <strong>Hedge Funds<\/strong> are <strong>investment vehicles<\/strong> that pool money to invest on behalf of their investors.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">The <strong>big difference<\/strong> between Hedge Funds and nearly every other type of investment fund is that <strong>Hedge Funds aim to \u2018Hedge Out\u2019 certain risks within their investment portfolio<\/strong>.<\/p>\n\n\n\n<div style=\"height:20px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-vs-other-investment-funds-2-1024x576.png\" alt=\"an image comparing Hedge Funds to other types of investment funds\" class=\"wp-image-50434\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-vs-other-investment-funds-2-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-vs-other-investment-funds-2-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-vs-other-investment-funds-2-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-vs-other-investment-funds-2-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-vs-other-investment-funds-2-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-vs-other-investment-funds-2.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p style=\"font-size:18.5px\">Let\u2019s jump ahead here and<strong> look at how Hedge Funds execute this strategy<\/strong>.<\/p>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" style=\"font-size:26px\"><strong>How Does \u2018Hedging\u2019 Work?<\/strong><\/h3>\n\n\n\n<p style=\"font-size:18.5px\">Let&#8217;s begin by explaining <strong>how Hedge Funds can \u2018<em>Hedge\u2019 <\/em>using an example that will be familiar if you have ever invested in a <\/strong><a href=\"https:\/\/finance-able.com\/the-difference-between-stocks-and-bonds\/\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Stock<\/span><\/strong><\/a>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><em><span class=\"has-inline-color has-luminous-vivid-orange-color\">Check out our <\/span><\/em><strong><em><a href=\"https:\/\/youtu.be\/d_whtPnvqKM\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">Stocks vs Bonds<\/span><\/a><\/em><span class=\"has-inline-color has-luminous-vivid-orange-color\"><em> animated explainer video<\/em><\/span><\/strong><em><span class=\"has-inline-color has-luminous-vivid-orange-color\"> for a <strong>brief overview of how Stocks work<\/strong>.<\/span><\/em><\/p>\n\n\n\n<p style=\"font-size:18.5px\">When a <strong>typical investor buys a stock<\/strong>, they make <strong>money when the Stock increases<\/strong> in value and <strong>lose money when the Stock decreases in value<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">We call this process <strong>&#8216;<em>Going Long.<\/em>&#8216;<\/strong><\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/how-going-long-stock-works-1024x576.png\" alt=\"an image showing how you profit when going long on stock\" class=\"wp-image-50248\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/how-going-long-stock-works-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/how-going-long-stock-works-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/how-going-long-stock-works-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/how-going-long-stock-works-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/how-going-long-stock-works-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/how-going-long-stock-works.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p style=\"font-size:18.5px\"><mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-luminous-vivid-orange-color\">In this<\/mark><em> <\/em><a href=\"https:\/\/www.youtube.com\/watch?v=i5YD7tYjghs\" target=\"_blank\" rel=\"noreferrer noopener\"><em><mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-vivid-cyan-blue-color\"><strong>quick video<\/strong><\/mark><\/em><\/a><em> <mark style=\"background-color:rgba(0, 0, 0, 0)\" class=\"has-inline-color has-luminous-vivid-orange-color\">on &#8216;Going Long,&#8217; we walk through a <strong>simple, animated explanation<\/strong> of how this process works.<\/mark><\/em><\/p>\n\n\n\n<p style=\"font-size:18.5px\">Conversely, an <strong>investor can also &#8216;<em>sell short<\/em>&#8216;<\/strong> a Stock. <\/p>\n\n\n\n<p style=\"font-size:18.5px\">When an Investor goes Short, they <strong>make money if the Stock decreases<\/strong> in value and will <strong>lose money if the Stock increases in value<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">We call this process <strong>&#8216;Going Short.&#8217;<\/strong><\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/how-going-short-stock-works-1024x576.png\" alt=\"an image showing how you profit when going short on a stock\" class=\"wp-image-50250\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/how-going-short-stock-works-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/how-going-short-stock-works-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/how-going-short-stock-works-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/how-going-short-stock-works-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/how-going-short-stock-works-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/how-going-short-stock-works.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n<!-- This site is converting visitors into subscribers and customers with OptinMonster - https:\/\/optinmonster.com :: Campaign Title: What is a Hedge Fund? - Obfuscation -->\n<div id=\"om-rijz02hejbspm33a3kyf-holder\"><\/div>\n<script>(function(d,u,ac){var s=d.createElement('script');s.type='text\/javascript';s.src='https:\/\/a.omappapi.com\/app\/js\/api.min.js';s.async=true;s.dataset.user=u;s.dataset.campaign=ac;d.getElementsByTagName('head')[0].appendChild(s);})(document,130718,'rijz02hejbspm33a3kyf');<\/script>\n<!-- \/ OptinMonster -->\n\n\n\n<p style=\"font-size:18.5px\"><em><span class=\"has-inline-color has-luminous-vivid-orange-color\">In this<\/span> <\/em><a href=\"https:\/\/www.youtube.com\/watch?v=W1XQ197S2Hk\" target=\"_blank\" rel=\"noreferrer noopener\"><em><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">quick video<\/span><\/strong><\/em><\/a><em> <span class=\"has-inline-color has-luminous-vivid-orange-color\">on &#8216;Going Short,&#8217; we walk through a <strong>simple, animated explanation<\/strong> of how this process works.<\/span><\/em><\/p>\n\n\n\n<p style=\"font-size:18.5px\">Now that we\u2019ve covered the <strong>mechanics of Long vs Short<\/strong>, let&#8217;s <strong>look at how this applies to professionally managed Investment Funds<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">To do that, we\u2019ll <strong>compare <a href=\"https:\/\/www.investopedia.com\/terms\/m\/mutualfund.asp\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">Mutual Funds<\/span><\/a> and Hedge Funds<\/strong>.<\/p>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h4 class=\"wp-block-heading\" style=\"font-size:25px\"><strong>Mutual Funds (Long-Only) vs Hedge Funds (Long\/Short)<\/strong><\/h4>\n\n\n\n<p style=\"font-size:18.5px\">Let\u2019s start here by <strong>quickly defining what a \u2018Mutual Funds\u2019 does<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">In short, <strong>Mutual Funds aggregate money<\/strong> from investors.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">These funds <strong>typically have a defined strategy<\/strong> where they <strong>invest in either Stocks or Bonds<\/strong>.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/mutual-funds-strategy-long-only-1-1024x576.png\" alt=\"An image showing that Mutual Funds typically only Go Long\" class=\"wp-image-50203\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/mutual-funds-strategy-long-only-1-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/mutual-funds-strategy-long-only-1-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/mutual-funds-strategy-long-only-1-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/mutual-funds-strategy-long-only-1-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/mutual-funds-strategy-long-only-1-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/mutual-funds-strategy-long-only-1.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Mutual Funds<\/strong> are often referred to as <strong>&#8216;Long-Only&#8217;<\/strong> investors because they <strong>typically only &#8216;Go Long.&#8217;<\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\"><\/p>\n\n\n\n<p style=\"font-size:18.5px\"><\/p>\n\n\n\n<p style=\"font-size:18.5px\">In contrast, <strong>Hedge Funds<\/strong> are called <strong><em>&#8216;Hedge&#8217;<\/em><\/strong> Funds because they <strong>&#8216;Hedge Out&#8217; the risk of their portfolio<\/strong> by <strong>simultaneously &#8216;Going Long&#8217; <em><u>and<\/u><\/em> &#8216;Going Short&#8217;<\/strong> different securities.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-strategy-long-short-1-1024x576.png\" alt=\"An image showing that Hedge Funds Go Long and Short\" class=\"wp-image-50204\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-strategy-long-short-1-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-strategy-long-short-1-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-strategy-long-short-1-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-strategy-long-short-1-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-strategy-long-short-1-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-strategy-long-short-1.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p style=\"font-size:18.5px\">As we will see later in this article, the aim is to <strong>cancel out some of the market risks of a traditional &#8216;Long-Only&#8217; portfolio<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">If you are wondering, <strong>\u2018where did this all come from in the first place?\u2019<\/strong>, hop ahead to find out.<\/p>\n\n\n\n<div style=\"height:60px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" style=\"font-size:26px\"><strong>Where did Hedge Funds Come From?<\/strong><\/h3>\n\n\n\n<p style=\"font-size:18.5px\"><strong><a href=\"https:\/\/en.wikipedia.org\/wiki\/Alfred_Winslow_Jones\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">Alfred Winslow Jones<\/span><\/a><\/strong> is believed to have <strong>created the first Hedge Fund in 1949<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">The idea for the Fund <strong>originated from Jones\u2019 desire to lower overall market risk when investing<\/strong>.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/alfred-winslow-jones-hedge-fund-to-cancel-risk-1-1024x576.png\" alt=\"a stick figure of Alfred Winslow Jones trying to figure out how to lower market risk\" class=\"wp-image-50259\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/alfred-winslow-jones-hedge-fund-to-cancel-risk-1-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/alfred-winslow-jones-hedge-fund-to-cancel-risk-1-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/alfred-winslow-jones-hedge-fund-to-cancel-risk-1-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/alfred-winslow-jones-hedge-fund-to-cancel-risk-1-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/alfred-winslow-jones-hedge-fund-to-cancel-risk-1-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/alfred-winslow-jones-hedge-fund-to-cancel-risk-1.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p style=\"font-size:18.5px\">To do this, Jones created a <strong>new type of Fund<\/strong> that would <strong>eliminate market risk<\/strong> by simultaneously <strong>going Long and Short<\/strong> different securities at the same time.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">In taking this approach, Jones would be <strong>rewarded for simply betting correctly on investments, regardless of the market\u2019s direction<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">This approach <strong>gave rise to the term &#8216;Long\/Short,&#8217;<\/strong> which is <strong>essentially synonymous<\/strong> with <strong>&#8216;Hedge Fund.&#8217;<\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\"><em><span class=\"has-inline-color has-luminous-vivid-orange-color\">In this <\/span><\/em><strong><em><a href=\"https:\/\/youtu.be\/WPI9UxtFlTQ?t=201\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">Quick Video<\/span><\/a><\/em><\/strong><em>, <span class=\"has-inline-color has-luminous-vivid-orange-color\">we walk through a <strong>brief, animated explanation<\/strong> of how a <strong>Hedge Fund manages its portfolios<\/strong> to go Long and Short at the same time.<\/span><\/em><\/p>\n\n\n\n<p style=\"font-size:18.5px\">Beyond inventing the Long\/Short approach, Jones also <strong>organized<\/strong> <strong>his Fund as a Partnership<\/strong>, used <strong>Leverage (i.e., borrowing)<\/strong> to invest more than the money invested in the Fund, and <strong>invented a new fee structure<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">To this day, <strong><em><u>nearly every Hedge Fund<\/u><\/em> <\/strong>employs the same<strong> legal structure<\/strong>, <strong>uses Leverage, and employs Jones\u2019 original fee structure<\/strong>.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-strategy-long-short-2-1024x576.png\" alt=\"an image showing that Alfred Winslow Jones approach has largely remained through today\" class=\"wp-image-50461\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-strategy-long-short-2-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-strategy-long-short-2-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-strategy-long-short-2-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-strategy-long-short-2-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-strategy-long-short-2-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-strategy-long-short-2.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p style=\"font-size:18.5px\">In subsequent decades, many now-prominent investment <strong>firms like <\/strong><a href=\"https:\/\/www.georgesoros.com\/\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Soros Funds<\/span><\/strong><\/a><strong>, <a href=\"https:\/\/en.wikipedia.org\/wiki\/Bridgewater_Associates\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">Bridgewater<\/span><\/a>, and <\/strong><a href=\"https:\/\/en.wikipedia.org\/wiki\/Tiger_Management\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Tiger Management<\/span><\/strong><\/a> have launched funds that <strong>mirror Jones\u2019s structure and approach<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>While there have certainly been ups and downs, Investors have found this investing approach attractive.<\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\">As a result, <strong>Assets Under Management (\u2018AUM\u2019) for Hedge Funds<\/strong> have grown dramatically in recent decades.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">According to Statista, <strong>Hedge Funds manage nearly <\/strong><a href=\"https:\/\/www.statista.com\/statistics\/271771\/assets-of-the-hedge-funds-worldwide\/\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">$4 trillion of Assets<\/span><\/strong><\/a><strong> as of the end of 2020<\/strong>.<\/p>\n\n\n\n<div style=\"height:60px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" style=\"font-size:26px\"><strong>What do Hedge Funds Invest in?<\/strong><\/h3>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Most Hedge Funds focus on a particular Asset Class (e.g., Stocks, Bonds, etc.) and\/or Strategy<\/strong>, which the Fund Managers agree upon with their investors.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">With that said, if the investors agree, a <strong>Hedge Fund can invest in basically anything<\/strong>.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"467\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/typical-hedge-funds-investments-2-1024x467.png\" alt=\"an image showing the most common instruments in which Hedge Funds invest.\" class=\"wp-image-50468\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/typical-hedge-funds-investments-2-1024x467.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/typical-hedge-funds-investments-2-300x137.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/typical-hedge-funds-investments-2-768x350.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/typical-hedge-funds-investments-2-400x183.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/typical-hedge-funds-investments-2-624x285.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/typical-hedge-funds-investments-2.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p style=\"font-size:18.5px\">Below is a summary of some of the most common types of Investments:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Stocks (i.e., Equity)<\/strong> \u2013 units of Ownership of a Company (e.g., Google, Facebook, etc.).<\/li>\n\n\n\n<li><strong>Bonds and Loans (i.e., Debt)<\/strong> \u2013 a variety of instruments ranging from Debt issued by Companies (&#8216;Corporate&#8217;) to Debt issues by Governments (i.e., &#8216;Sovereign&#8217;).&nbsp;<\/li>\n\n\n\n<li><strong>Commodities<\/strong> \u2013 any undifferentiated raw material ranging from Oil and Gas to Copper and Iron Ore.<\/li>\n\n\n\n<li><strong>Currencies<\/strong> (&#8216;FX&#8217;) \u2013 money issued by various governments around the world.<\/li>\n\n\n\n<li><strong>Derivatives<\/strong> \u2013 complex securities like Options, swaps and futures that &#8216;derive&#8217; their value from any other security.<\/li>\n<\/ul>\n\n\n\n<p style=\"font-size:18.5px\">A <strong>single fund can invest in all the instruments above<\/strong>, but as mentioned above, <strong>they often focus on just one or two<\/strong>.<\/p>\n\n\n\n<div style=\"height:60px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" style=\"font-size:26px\"><strong>Typical Hedge Fund Investment Strategies<\/strong><\/h3>\n\n\n\n<p style=\"font-size:18.5px\">It is <strong>difficult to describe a &#8216;typical&#8217; Hedge Fund<\/strong> because there are <strong>so many different strategies<\/strong>. But we will give it a try here!<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Broadly speaking, <strong>Hedge Fund investment strategies<\/strong> fall into a few big groups: <strong>Fundamental Investing, Macro Investing, <\/strong>and<strong> Quantitative Investing<\/strong>.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/three-hedge-fund-investment-strategies-2-1024x576.png\" alt=\"an image summarizing the three typical hedge fund investment strategies: Fundamental, Macro and Quantitative\" class=\"wp-image-50471\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/three-hedge-fund-investment-strategies-2-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/three-hedge-fund-investment-strategies-2-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/three-hedge-fund-investment-strategies-2-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/three-hedge-fund-investment-strategies-2-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/three-hedge-fund-investment-strategies-2-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/three-hedge-fund-investment-strategies-2.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p style=\"font-size:18.5px\">Let&#8217;s <strong>dive into each Hedge Fund strategy <\/strong>and see how they operate. <\/p>\n\n\n\n<div style=\"height:60px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h4 class=\"wp-block-heading\" style=\"font-size:25px\"><strong>Fundamental Hedge Funds<\/strong><\/h4>\n\n\n\n<p style=\"font-size:18.5px\"><\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Fundamental Hedge Funds <\/strong>invest in securities <strong>based on the underlying performance of the Business behind the security<\/strong> they purchase (<a href=\"https:\/\/finance-able.com\/the-difference-between-stocks-and-bonds\/\"><span class=\"has-inline-color has-vivid-cyan-blue-color\"><strong>Bond<\/strong><\/span><\/a>, <a href=\"https:\/\/finance-able.com\/the-difference-between-stocks-and-bonds\/\"><span class=\"has-inline-color has-vivid-cyan-blue-color\"><strong>Stock<\/strong><\/span><\/a>, <a href=\"https:\/\/www6.royalbank.com\/en\/di\/hubs\/investing-academy\/chapter\/what-are-options\/jv7atfyu\/jv7atg0t#:~:text=Options%20are%20essentially%20contracts%20between,a%20specific%20amount%20of%20time.&amp;text=Options%20are%20securities%20themselves%2C%20like,%2C%20they're%20called%20derivatives.\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Options<\/span><\/strong><\/a>, etc.).<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/fundamental-hedge-fund-business-driven-1-1024x576.png\" alt=\"a fundamental hedge fund manager analyzing individual businesses and investing in stocks or bonds\" class=\"wp-image-50277\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/fundamental-hedge-fund-business-driven-1-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/fundamental-hedge-fund-business-driven-1-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/fundamental-hedge-fund-business-driven-1-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/fundamental-hedge-fund-business-driven-1-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/fundamental-hedge-fund-business-driven-1-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/fundamental-hedge-fund-business-driven-1.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p style=\"font-size:18.5px\">There are a <strong>WIDE variety of strategies employed by Fundamental Hedge Funds<\/strong>:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Traditional Long\/Short Equity<\/strong> \u2013 go long and short individual Stocks based on future performance of the underlying Business.<\/li>\n\n\n\n<li><a href=\"https:\/\/www.investopedia.com\/terms\/e\/eventdriven.asp\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Event-Driven<\/span><\/strong> <\/a>\u2013 make hedged investments in Stock based on upcoming business events (e.g., M&amp;A, Restructuring, etc.) that will drive a change in the Stock price.<\/li>\n\n\n\n<li><strong><a href=\"https:\/\/www.streetofwalls.com\/articles\/hedge-fund\/learn-the-basics\/activist-hedge-funds\/\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">Activist<\/span><\/a><\/strong> \u2013 take sizable stakes in companies and agitate for changes (e.g., operational improvement, acquisitions, and divestitures, etc.).<\/li>\n\n\n\n<li><strong>Merger\/Convertible Bond Arbitrage<\/strong> \u2013 make hedged investments in Stocks and Bonds to capture pricing discrepancies between related securities (e.g., convertible bond vs underlying common Stock) or the current price versus the acquisition offer price in an <strong><a href=\"https:\/\/www.investopedia.com\/terms\/m\/mergersandacquisitions.asp\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">M&amp;A<\/span><\/a><\/strong> scenario.<\/li>\n\n\n\n<li><strong><a href=\"https:\/\/online.hbs.edu\/blog\/post\/distressed-debt-investing#:~:text=Distressed%20debt%20investing%E2%80%94also%20called,has%20an%20unstable%20capital%20structure.\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">Distressed Debt<\/span><\/a><\/strong> \u2013 invest in the Bonds and Loans of companies experiencing financing distress.<\/li>\n<\/ul>\n\n\n\n<p style=\"font-size:18.5px\">The list above is <strong>by no means exhaustive<\/strong>, but it captures some of the <strong>most common types of Fundamental Hedge Funds you will encounter<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">The <strong>reason it is so hard<\/strong> to characterize a \u2018<strong>typical\u2019 fund<\/strong> is that many <strong>funds employ more than one of the strategies above<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">With that said, a few of the <strong>most well-known Fundamental Hedge Funds<\/strong> are <strong><a href=\"https:\/\/www.tigerglobal.com\/\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">Tiger Global Management<\/span><\/a>, <a href=\"https:\/\/en.wikipedia.org\/wiki\/Coatue_Management\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">Coatue Management<\/span><\/a>, <a href=\"https:\/\/en.wikipedia.org\/wiki\/Third_Point_Management\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">Third Point<\/span><\/a>, and <a href=\"https:\/\/en.wikipedia.org\/wiki\/Pershing_Square_Capital_Management\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">Pershing Square<\/span><\/a><\/strong>.<\/p>\n\n\n\n<div style=\"height:60px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h4 class=\"wp-block-heading\" style=\"font-size:25px\"><strong>Macro Hedge Funds<\/strong><\/h4>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Macro Funds <\/strong>focus on the bigger picture and invest based on <strong>anticipated trends in the global economy<\/strong>.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/macro-hedge-fund-global-economy-driven-2-1024x576.png\" alt=\"a macro hedge fund manager analyzing global events and investing in stocks, bonds, currencies and commodities\" class=\"wp-image-50287\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/macro-hedge-fund-global-economy-driven-2-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/macro-hedge-fund-global-economy-driven-2-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/macro-hedge-fund-global-economy-driven-2-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/macro-hedge-fund-global-economy-driven-2-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/macro-hedge-fund-global-economy-driven-2-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/macro-hedge-fund-global-economy-driven-2.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p style=\"font-size:18.5px\">Instead of looking at individual securities, they <strong>invest based on<\/strong> <strong>significant economic shifts.  in interest rates, geopolitical events, commodities, and currencies<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18px\">Macro Hedge Funds then <strong>invest in Stocks, Bonds, Currencies, etc.<\/strong> to capitalize based on shifts they expect to occur.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">A few of the <strong>most well-known Macro Hedge Funds<\/strong> are <strong><a href=\"https:\/\/www.bridgewater.com\/\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">Bridgewater Associates<\/span><\/a>, <a href=\"https:\/\/en.wikipedia.org\/wiki\/Soros_Fund_Management\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">Soros Funds<\/span><\/a>, <a href=\"https:\/\/www.tudor.com\/\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">Tudor<\/span><\/a><\/strong>.<\/p>\n\n\n\n<div style=\"height:60px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h4 class=\"wp-block-heading\" style=\"font-size:25px\"><strong>Quantitative Hedge Funds<\/strong><\/h4>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Quantitative Funds (or &#8216;Quants&#8217;) <\/strong>invest based on <strong>complex algorithms<\/strong>, typically <strong>created by Math PhD&#8217;s<\/strong>.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/quantitative-hedge-fund-algorithms-3-1024x576.png\" alt=\"a quantitative hedge fund manager using algorithms to analyze stocks, bonds, currencies and commodities\" class=\"wp-image-50298\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/quantitative-hedge-fund-algorithms-3-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/quantitative-hedge-fund-algorithms-3-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/quantitative-hedge-fund-algorithms-3-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/quantitative-hedge-fund-algorithms-3-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/quantitative-hedge-fund-algorithms-3-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/quantitative-hedge-fund-algorithms-3.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p style=\"font-size:18.5px\">These Funds <strong>apply the algorithms<\/strong> they create to nearly <strong>any type of liquid investment <\/strong>(Stocks, Bonds, etc.).<\/p>\n\n\n\n<p style=\"font-size:18.5px\">These funds are truly the <strong><em>&#8216;black box&#8217;<\/em><\/strong> within the Hedge Fund world. <strong>And rightfully so<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Their <strong>proprietary algorithms<\/strong> create advantages that would <strong>quickly erode<\/strong> <strong>if other funds caught on<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">This <strong>algorithmic approach of Quantitative Hedge Funds<\/strong> has created some genuinely <strong>astounding returns<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">As an example, <strong>Renaissance Technologies (often called \u2018Rentec\u2019)<\/strong> has <strong>generated <a href=\"https:\/\/en.wikipedia.org\/wiki\/Renaissance_Technologies#:~:text=%22Since%201988%2C%20his%20flagship%20Medallion,the%20investment%20world%20comes%20close.\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">39% annual returns<\/span><\/a> after fees since 1988<\/strong>. These returns have generated <a href=\"https:\/\/en.wikipedia.org\/wiki\/Renaissance_Technologies#:~:text=%22Since%201988%2C%20his%20flagship%20Medallion,the%20investment%20world%20comes%20close.\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">dollar gains of over $100 billion<\/span><\/strong><\/a>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">A few of the additional <strong>well-known Quantitative Funds are <a href=\"https:\/\/www.deshaw.com\/\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">D.E. Shaw<\/span><\/a>, <span class=\"has-inline-color has-vivid-cyan-blue-color\"><a href=\"https:\/\/www.aqr.com\/About-Us\/OurFirm?gclid=Cj0KCQjwlOmLBhCHARIsAGiJg7kbHZnPEsOOTihMoW3JP4hI55wX71EbiwWUBQ8XBTzaBvlY-KNBlh0aAr_7EALw_wcB\" target=\"_blank\" rel=\"noreferrer noopener\">AQR<\/a> <\/span>and <a href=\"https:\/\/www.twosigma.com\/\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">Two Sigma<\/span><\/a><\/strong>.<\/p>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h4 class=\"wp-block-heading\" style=\"font-size:25px\"><strong>Multi-Strategy Hedge Funds<\/strong><\/h4>\n\n\n\n<p style=\"font-size:18.5px\">Next, <strong>just to keep things interesting, some funds run multiple strategies<\/strong>.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/multi-strategy-hedge-fund-approach-1-1024x576.png\" alt=\"a multi-strategy hedge fund manager investing in a variety of strategies\" class=\"wp-image-50307\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/multi-strategy-hedge-fund-approach-1-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/multi-strategy-hedge-fund-approach-1-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/multi-strategy-hedge-fund-approach-1-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/multi-strategy-hedge-fund-approach-1-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/multi-strategy-hedge-fund-approach-1-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/multi-strategy-hedge-fund-approach-1.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p style=\"font-size:18.5px\">Those funds are simply called <a href=\"https:\/\/caia.org\/blog\/2021\/01\/26\/multi-strategy-hedge-funds-equity-in-a-different-shade\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">&#8216;Multi-Strategy&#8217; funds<\/span><\/strong><\/a><strong> or &#8216;Multi-Strat&#8217; funds<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">A few of the <strong>most well-known Multi-Strategy funds<\/strong> are <a href=\"https:\/\/www.mlp.com\/?gclid=CjwKCAjw2vOLBhBPEiwAjEeK9lQL6oOjvaahPdKqA12gBxSuPk_ZFAMQs_bctgvxGJ5H_L_WcgCgiBoCeGgQAvD_BwE\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\"><strong>Millennium Capital Partners<\/strong><\/span><\/a> and <a href=\"https:\/\/www.citadel.com\/\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\"><strong>Citadel<\/strong><\/span><\/a>.<\/p>\n\n\n\n<div style=\"height:60px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h4 class=\"wp-block-heading\" style=\"font-size:25px\"><strong>Fund of Hedge Funds (&#8216;Fund of Funds&#8217;<\/strong>)<\/h4>\n\n\n\n<p style=\"font-size:18.5px\">Last, we have <strong>Funds of Funds<\/strong>, which <strong>invest in other Hedge Funds<\/strong>.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/fund-of-funds-approach-1024x576.png\" alt=\"a hedge fund manager analyzing investments in other hedge fund managers\" class=\"wp-image-50235\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/fund-of-funds-approach-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/fund-of-funds-approach-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/fund-of-funds-approach-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/fund-of-funds-approach-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/fund-of-funds-approach-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/fund-of-funds-approach.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Instead of investing in <em><u>securities<\/u><\/em><\/strong>, these funds <strong><u>look for top-performing Hedge Fund <em>managers<\/em><\/u><\/strong> to invest behind.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">A few of the <strong>most well-known Fund of Funds<\/strong> are and <a href=\"https:\/\/www.blackstone.com\/our-businesses\/hedge-fund-solutions-baam\/\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Blackstone Alternative Asset Management<\/span><\/strong><\/a> and <a href=\"https:\/\/www.gcmgrosvenor.com\/\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\"><strong>Grosvenor<\/strong><\/span><\/a>.<\/p>\n\n\n\n<div style=\"height:80px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" style=\"font-size:35px\"><strong>What is a Hedge Fund? \u2013 Inner Workings<\/strong><\/h2>\n\n\n\n<p style=\"font-size:18.5px\"><strong><em>Key Question(s) Covered:<\/em><\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong><em>How do Hedge Funds work?<\/em><\/strong><\/li>\n\n\n\n<li><strong><em>What fees do Hedge Funds typically charge?<\/em><\/strong><\/li>\n<\/ul>\n\n\n\n<div style=\"height:1px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\">Now let\u2019s take a <strong>peek behind the curtain<\/strong> and see <strong>how Hedge Funds actually work<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">This next section will walk through <strong>legal structures, fees, and the complexities of managing a long\/short portfolio<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">In addition to creating the Long\/Short approach of Hedge Funds, <strong>Alfred Winslow Jones<\/strong> also <strong>pioneered the usage of the partnership legal structure<\/strong> <strong>and the<\/strong> <strong>fee structure<\/strong> that is still widely employed with Hedge Funds today.<\/p>\n\n\n\n<div style=\"height:60px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" style=\"font-size:26px\"><strong>Typical Legal Structure of a Hedge Fund<\/strong><\/h3>\n\n\n\n<p style=\"font-size:18.5px\">A few years after launching his Fund, <strong>Alfred Winslow Jones converted his Fund\u2019s legal structure into a Partnership<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">To this day<strong>, most Hedge Funds<\/strong> managers utilize the <strong>Partnership structure to launch their funds<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">With this structure, the Hedge Fund founders (&#8216;Partners&#8217;) own the <strong>General Partner (or &#8216;GP&#8217;), which manages the Fund&#8217;s day-to-day operations<\/strong>.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-partnership-structure-1-1024x576.png\" alt=\"an image laying out the typical drivers of a hedge fund partnership\" class=\"wp-image-50322\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-partnership-structure-1-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-partnership-structure-1-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-partnership-structure-1-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-partnership-structure-1-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-partnership-structure-1-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-partnership-structure-1.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p style=\"font-size:18.5px\">The Fund&#8217;s <strong>Investors are Limited Partners (or &#8216;LPs&#8217;)<\/strong> who <strong>contribute money<\/strong> to the Fund. But <strong>the LPs do not have any influence with regard to individual fund investments.<\/strong><\/p>\n\n\n\n<div style=\"height:60px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" style=\"font-size:26px\"><strong>What fees do Hedge Funds charge?<\/strong><\/h3>\n\n\n\n<p style=\"font-size:18.5px\">The <strong>fee structure<\/strong> that Hedge Funds employ <strong>also goes back<\/strong> <strong>to<\/strong> the original Fund started by Alfred Winslow Jones.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Jones employed a <strong>fee structure<\/strong> in which investors would pay <strong>2% of Assets Managed<\/strong> and <strong>20% of any Profit generated<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">He likened this to the <strong>Phoenician ship captains<\/strong> who <strong>kept one-fifth of any profits<\/strong> generated on successful voyages. (<a href=\"https:\/\/www.newenglandhistoricalsociety.com\/alfred-winslow-jones-the-unlikely-inventor-of-the-hedge-fund\/\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\"><strong>Source<\/strong><\/span><\/a>)<\/p>\n\n\n\n<p style=\"font-size:18.5px\">This <strong>fee structure<\/strong>, often referred to as <strong><em>&#8216;2 and 20,&#8217;<\/em> remains the benchmark even today<\/strong>.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-management-fee-and-carried-interest-2-1024x576.png\" alt=\"an image showing the typical management fees and carried interest paid to Hedge Funds\" class=\"wp-image-50500\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-management-fee-and-carried-interest-2-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-management-fee-and-carried-interest-2-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-management-fee-and-carried-interest-2-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-management-fee-and-carried-interest-2-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-management-fee-and-carried-interest-2-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-management-fee-and-carried-interest-2.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p style=\"font-size:18.5px\">The <strong>2% fee<\/strong> on Assets managed is referred to as a <strong>&#8216;Management Fee.&#8217;<\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\">And the <strong>20% cut of profit<\/strong> <strong>generated<\/strong> is referred to as <strong>&#8216;Carried Interest&#8217; or &#8216;Carry.&#8217;<\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\">It is worth noting that funds have experienced <strong>meaningful &#8216;fee compression&#8217;<\/strong> in this structure <strong>in recent years<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">A <strong>recent study<\/strong> by <a href=\"https:\/\/www.hfr.com\/\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\"><strong>HFR<\/strong><\/span><\/a>, showed that <strong>most Hedge Fund managers charge Management Fees of 1.4% and Carried Interest fees of 16.4% on Average (<a href=\"https:\/\/www.cnbc.com\/2021\/06\/28\/two-and-twenty-is-long-dead-hedge-fund-fees-fall-further-below-one-time-industry-standard.html#:~:text=In%20recent%20years%2C%20average%20fees,was%20commonplace%20a%20decade%20prior.\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">more here<\/span><\/a>)<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Today, only the <strong>most sought-after funds are able to charge the full 2% Management Fee and 20% Carried Interest fee structure<\/strong>.<\/p>\n\n\n\n<div style=\"height:60px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" style=\"font-size:26px\"><strong>Constructing a Hedge Fund Portfolio<\/strong><\/h3>\n\n\n\n<p style=\"font-size:18.5px\">We said earlier in the article that <strong>Hedge Funds go Long and Short different securities<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>In theory<\/strong>, a portfolio of <strong>Long investments offset<\/strong> by a portfolio of <strong>Short investments should hedge out the market.<\/strong><\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-management-idea-vs-reality-1-1024x576.png\" alt=\"an image showing the contrast between the concept of managing a hedge fund and the reality\" class=\"wp-image-50210\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-management-idea-vs-reality-1-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-management-idea-vs-reality-1-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-management-idea-vs-reality-1-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-management-idea-vs-reality-1-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-management-idea-vs-reality-1-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-management-idea-vs-reality-1.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p style=\"font-size:18.5px\"><strong>In reality<\/strong>, managing a Hedge Fund portfolio is <strong>much more complicated<\/strong>.<\/p>\n\n\n\n<div style=\"height:60px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h4 class=\"wp-block-heading\" style=\"font-size:25px\"><strong>Portfolio Risk Factors<\/strong><\/h4>\n\n\n\n<p style=\"font-size:18.5px\">To begin with, a <strong>Hedge Fund Manager<\/strong> needs to <strong>monitor the portfolio for a variety of risk factors constantly<\/strong>.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-manager-unintentional-bets-1-1024x576.png\" alt=\"an image showing a hedge fund manager wondering what unintentional bets they are making\" class=\"wp-image-50213\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-manager-unintentional-bets-1-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-manager-unintentional-bets-1-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-manager-unintentional-bets-1-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-manager-unintentional-bets-1-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-manager-unintentional-bets-1-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-manager-unintentional-bets-1.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p style=\"font-size:18.5px\">Some <strong>common risk factors are<\/strong>:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Industry\/Sector Concentration<\/li>\n\n\n\n<li>Geographic Concentration<\/li>\n\n\n\n<li>Style Concentration (Growth vs. Value)<\/li>\n\n\n\n<li>Cross-Currency Bets<\/li>\n<\/ul>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Every single day<\/strong> <strong>the market changes,<\/strong> and the <strong>portfolio shifts<\/strong> along with those changes.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Fund Managers need to actively monitor the portfolio for the above factors (and many others) <\/strong>to ensure they aren&#8217;t unintentionally exposing their funds to significant risks.<\/p>\n\n\n\n<div style=\"height:60px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h4 class=\"wp-block-heading\" style=\"font-size:25px\"><strong>Longs vs. Short Exposure in a Hedge Fund Portfolio<\/strong><\/h4>\n\n\n\n<p style=\"font-size:18.5px\">Next, there is the <strong>complexity of managing a Hedge Fund\u2019s Short investments<\/strong>. <\/p>\n\n\n\n<p style=\"font-size:18.5px\">Briefly, <strong>Short Investments <\/strong>are much <strong>more challenging to manage<\/strong> due to:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Unlimited Downside potential.<\/li>\n\n\n\n<li>More day-to-day volatility.<\/li>\n\n\n\n<li>The need for higher Number of Shorts vs Longs in a portfolio.<\/li>\n\n\n\n<li>Short Squeeze risk.<\/li>\n<\/ul>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/longs-easy-shorts-hard-1-1024x576.png\" alt=\"an image showing that long investments are easy but short investments are difficult\" class=\"wp-image-50335\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/longs-easy-shorts-hard-1-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/longs-easy-shorts-hard-1-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/longs-easy-shorts-hard-1-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/longs-easy-shorts-hard-1-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/longs-easy-shorts-hard-1-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/longs-easy-shorts-hard-1.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p style=\"font-size:18.5px\">As a <strong>quick recap<\/strong>, remember that you <strong>lose money<\/strong> when you are <strong>Go Short an investment and it increases in value<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Because <strong>there is no limit to how high a Stock&#8217;s price can increase<\/strong>, an investor has <strong>unlimited downside with Shorts<\/strong>.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/long-vs-short-upside-vs-downside-1-1024x576.png\" alt=\"an image showing that how you generate gains and losses with short investments\" class=\"wp-image-50337\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/long-vs-short-upside-vs-downside-1-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/long-vs-short-upside-vs-downside-1-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/long-vs-short-upside-vs-downside-1-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/long-vs-short-upside-vs-downside-1-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/long-vs-short-upside-vs-downside-1-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/long-vs-short-upside-vs-downside-1.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p style=\"font-size:18.5px\">In addition, Short investments <strong>tend to be MUCH more volatile.<\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\">As a result, each <strong>Short investment<\/strong> tends to be <strong>much smaller than long investments as a percentage of the portfolio<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">So, a <strong>typical fund<\/strong> might have <strong>20 Long Investments<\/strong> but <strong>40-60 Short investments<\/strong> to ensure they are not taking excessive risks on any individual short.<\/p>\n\n\n\n<div style=\"height:20px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h4 class=\"wp-block-heading\" style=\"font-size:25px\"><strong>Short Squeezes and Meme Stocks<\/strong><\/h4>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Beyond higher day-to-day volatility<\/strong>, there is the dreaded <strong>&#8216;Short Squeeze.&#8217;<\/strong><\/p>\n\n\n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/short-squeeze-1-1024x576.png\" alt=\"an image showing the words short squeeze and a price chart\" class=\"wp-image-50339\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/short-squeeze-1-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/short-squeeze-1-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/short-squeeze-1-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/short-squeeze-1-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/short-squeeze-1-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/short-squeeze-1.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\">Very briefly, a <strong>&#8216;Short Squeeze&#8217;<\/strong> occurs when a <strong>Stock is heavily shorted,<\/strong> and all of the <strong>Investors head for the exits<\/strong> (i.e., the &#8216;<a href=\"https:\/\/www.investopedia.com\/terms\/b\/buytocover.asp#:~:text=Buy%20to%20cover%20refers%20to,be%20repaid%20at%20some%20point.\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Buy to Cover<\/span><\/strong><\/a>&#8216; to close out their position) at once.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">This <strong>flurry of buying creates a circular boost<\/strong> to the Stock Price, resulting in <strong>dramatic price movements<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Over the last year<\/strong>, we have witnessed major <strong>short squeezes with &#8216;Meme Stocks\u2019<\/strong> like GameStop and AMC.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/meme-stocks-gamestop-amc-1-1024x576.png\" alt=\"Stock charts of Gamestop and AMC during a short squeeze\" class=\"wp-image-50343\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/meme-stocks-gamestop-amc-1-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/meme-stocks-gamestop-amc-1-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/meme-stocks-gamestop-amc-1-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/meme-stocks-gamestop-amc-1-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/meme-stocks-gamestop-amc-1-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/meme-stocks-gamestop-amc-1.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p style=\"font-size:18.5px\">More on that <strong><a href=\"https:\/\/www.cnbc.com\/2021\/09\/03\/meme-stock-mania-is-still-messing-up-hedge-funds-and-some-of-wall-streets-regular-practices.html\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">here<\/span><\/a><\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">In summary, <strong>Shorting is a <em><u>very challenging<\/u><\/em> endeavor<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">The <strong>challenges around managing shorts<\/strong> are a <strong>big reason<\/strong> why <strong>investors pay Hedge Fund Managers higher fees<\/strong> than managers of traditional investment vehicles like Mutual Funds.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Now we will look at the <strong>risks of Investing in a Hedge Fund<\/strong>.<\/p>\n\n\n\n<div style=\"height:80px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" style=\"font-size:35px\"><strong>What is a Hedge Fund? &#8211; Risks<\/strong><\/h2>\n\n\n\n<p style=\"font-size:18.5px\"><strong><em>Key Question(s) Covered:<\/em><\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong><em>Why are Hedge Funds Considered Risky?<\/em><\/strong><\/li>\n\n\n\n<li><strong><em>What role do Leverage and Liquidity play in a Hedge Fund?<\/em><\/strong><\/li>\n\n\n\n<li><strong><em>What is Gross Exposure vs. Net Exposure?<\/em><\/strong><\/li>\n<\/ul>\n\n\n\n<div style=\"height:1px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\">In this section, we will dig into <strong>the risks involved with investing in Hedge Funds<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">While we <strong>could probably come up with a longer list<\/strong>, there are <strong>a few key risk factors<\/strong> that you need to consider when investing in Hedge Funds:<\/p>\n\n\n\n<ol style=\"list-style-type:1\" class=\"wp-block-list\">\n<li><strong>Liquidity<\/strong><\/li>\n\n\n\n<li><strong>Leverage<\/strong><\/li>\n\n\n\n<li><strong>Derivatives<\/strong><\/li>\n<\/ol>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" style=\"font-size:26px\"><strong>Hedge Fund Risk Factor #1: Liquidity<\/strong><\/h3>\n\n\n\n<p style=\"font-size:18.5px\">The <strong>first significant risk factor to consider is liquidity<\/strong>, or the ability to sell (i.e., liquidate) your investment in a Fund.&nbsp;<\/p>\n\n\n\n<p style=\"font-size:18.5px\">As a point of contrast, when you invest in a <strong>Mutual Fund<\/strong>, you can <strong>sell out of your investment every day<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>With Hedge Funds, that is not the case.<\/strong><\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-investor-liquidity-1-1024x576.png\" alt=\"an image showing an investor asking a hedge fund manager how often they can take money out\" class=\"wp-image-50348\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-investor-liquidity-1-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-investor-liquidity-1-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-investor-liquidity-1-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-investor-liquidity-1-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-investor-liquidity-1-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-investor-liquidity-1.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Most Hedge Funds<\/strong> operate on a <strong>Quarterly redemption cycle<\/strong> in which you are <strong>only able to exit<\/strong> the Fund at the <strong>end of each quarter<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">And <strong>as funds gain clout<\/strong> with investors, they <strong>often &#8216;Lock Up&#8217; <\/strong>capital for much longer.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Lock-ups for highly sought-after funds can <strong>range from 6-12 months, with some extending for multiple years<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">On the <strong>positive side<\/strong>, if you believe in the Hedge Fund manager, a <strong>fund lock-up<\/strong> <strong>works well<\/strong> because the <strong>Hedge Fund Manager can truly make long-term bets<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">On the other hand, if the Fund <strong>begins to go in the wrong direction<\/strong>, you can do very little<strong> to exit until the lock-up ends<\/strong>.<\/p>\n\n\n\n<div style=\"height:60px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h4 class=\"wp-block-heading\" style=\"font-size:25px\"><strong>Further Liquidity Constraints with Private Investments<\/strong><\/h4>\n\n\n\n<p style=\"font-size:18.5px\">In recent years, Hedge Funds have become <strong>heavily invested in Private Company investments<\/strong> which bear more resemblance to a traditional <a href=\"https:\/\/finance-able.com\/private-equity-vs-venture-capital\/\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Private Equity<\/span><\/strong><\/a> approach.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">For many funds, these <strong>investments have materially improved returns<\/strong> as noted in this <strong><a href=\"https:\/\/www.wsj.com\/articles\/as-hedge-funds-endure-rocky-year-private-company-bets-ease-the-pain-11634981400\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">recent article<\/span><\/a> in the Wall Street Journal<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">While these investments have increased returns, they have <strong>further decreased the level of Liquidity<\/strong> available to the investors in these Hedge Funds.<\/p>\n\n\n\n<div style=\"height:60px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" style=\"font-size:26px\"><strong>Hedge Fund Risk Factor #2: Leverage<\/strong><\/h3>\n\n\n\n<p style=\"font-size:18.5px\">The <strong>next significant risk factor<\/strong> to consider with Hedge Funds is <strong>Leverage<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">To begin with, <strong>Leverage is just a fancy word<\/strong> to describe <strong>the level of Debt<\/strong> taken on by the Fund to <strong>make investments beyond the money provided by Investors<\/strong>.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/stick-figure-deciding-whether-to-borrow-1024x576.png\" alt=\"an image showing a hedge fund manager wondering whether or not they should borrow\" class=\"wp-image-50357\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/stick-figure-deciding-whether-to-borrow-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/stick-figure-deciding-whether-to-borrow-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/stick-figure-deciding-whether-to-borrow-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/stick-figure-deciding-whether-to-borrow-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/stick-figure-deciding-whether-to-borrow-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/stick-figure-deciding-whether-to-borrow.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p style=\"font-size:18.5px\">Most <strong>Hedge Funds<\/strong> <strong>use some amount of Leverage<\/strong> in their Fund.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">In short, if <strong>investors contribute $100<\/strong> of money to the Fund, the <strong>Fund Manager will borrow<\/strong> to invest in securities with a <strong>value greater than $100<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Borrowing in this way increases the risk to the portfolio, as we will see below.<\/strong><\/p>\n\n\n\n<div style=\"height:60px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h4 class=\"wp-block-heading\" style=\"font-size:25px\"><strong>How Leverage Impacts Returns<\/strong><\/h4>\n\n\n\n<p style=\"font-size:18.5px\">Let\u2019s use a <strong>simple example to explain the impact of Leverage.<\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\">We\u2019ll imagine that a <strong>Hedge Fund Manager <\/strong>takes in<strong> $100 in capital from Investors<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Let\u2019s imagine that the Fund Manager only buys $100 of Stocks. And let\u2019s imagine <strong>the portfolio declines in value by 10%<\/strong>.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-ten-percent-loss-no-leverage-2-1024x576.png\" alt=\"an image showing a hedge fund with just $100 of long investments and a 10% loss\" class=\"wp-image-50538\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-ten-percent-loss-no-leverage-2-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-ten-percent-loss-no-leverage-2-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-ten-percent-loss-no-leverage-2-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-ten-percent-loss-no-leverage-2-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-ten-percent-loss-no-leverage-2-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-ten-percent-loss-no-leverage-2.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p style=\"font-size:18.5px\">In that case, <strong>the investors would lose 10% of their money.<\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\">Now let\u2019s imagine the<strong> Hedge Fund manager borrows to buy an extra $50 in Stocks<\/strong>.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-ten-percent-loss-with-leverage-1-1024x576.png\" alt=\"an image showing a hedge fund with just $100 of long investments and a 15% loss\" class=\"wp-image-50535\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-ten-percent-loss-with-leverage-1-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-ten-percent-loss-with-leverage-1-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-ten-percent-loss-with-leverage-1-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-ten-percent-loss-with-leverage-1-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-ten-percent-loss-with-leverage-1-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-ten-percent-loss-with-leverage-1.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p style=\"font-size:18.5px\">In this case, <strong>a 10% decline<\/strong> in the total portfolio would result in a <strong>$15 decrease in value (or a 15% loss).<\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\">As you can see from this example, <strong>borrowing<\/strong> in this way increases the <strong>potential downside<\/strong>. <\/p>\n\n\n\n<p style=\"font-size:18.5px\">On the flip side, though, this <strong>also creates the opportunity for increased reward<\/strong>. <\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>At this point, <\/strong>we need to <strong>discuss the terms \u2018Gross Exposure\u2019 and \u2018Net Exposure.\u2019<\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\">These terms will help us to see better<strong> how Hedge Funds use Leverage<\/strong> and how they <strong>Go Short<\/strong> to <strong>offset the risk<\/strong> created by the Leverage.<\/p>\n\n\n\n<div style=\"height:60px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h4 class=\"wp-block-heading\" style=\"font-size:25px\"><strong>Hedge Fund Gross Exposure<\/strong><\/h4>\n\n\n\n<p style=\"font-size:18.5px\">With a <strong>typical Long\/Short Equity Hedge Fund<\/strong>, the Hedge Fund manager will <strong>invest money by buying (\u2018Going Long\u2019) $100 of Stocks<\/strong>.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-buys-long-investments-1024x576.png\" alt=\"hedge fund manager buys $100 of long investments\" class=\"wp-image-50366\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-buys-long-investments-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-buys-long-investments-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-buys-long-investments-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-buys-long-investments-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-buys-long-investments-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-buys-long-investments.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p style=\"font-size:18.5px\">At the same time, the Hedge Fund Manager would <strong>typically borrow beyond the $100 contributed by Investors<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">But <strong>instead of Going Long, they Go Short<\/strong>, which <strong>offsets the overall risk<\/strong> of the portfolio.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Let\u2019s say the fund manager <strong>\u2018Goes Short\u2019 an additional $50 of Stocks.<\/strong><\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-short-investments-1024x576.png\" alt=\"hedge fund manager short $50 of Stock\" class=\"wp-image-50368\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-short-investments-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-short-investments-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-short-investments-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-short-investments-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-short-investments-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-short-investments.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p style=\"font-size:18.5px\">At this point, the Hedge Fund has <strong>$150 invested ($100 Long + $50 Short)<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">In short, the Hedge Fund is <strong>borrowing (i.e., using \u2018Leverage\u2019)<\/strong> <strong>to fund the additional $50 <\/strong>of Short investments.<\/p>\n\n\n\n<figure class=\"wp-block-image\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-gross-exposure-150-percent-1024x576.png\" alt=\"\" class=\"wp-image-50370\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-gross-exposure-150-percent-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-gross-exposure-150-percent-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-gross-exposure-150-percent-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-gross-exposure-150-percent-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-gross-exposure-150-percent-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-gross-exposure-150-percent.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p style=\"font-size:18.5px\">In the <strong>Hedge Fund world<\/strong>, we would say that this Fund has <strong>150% \u2018Gross Exposure\u2019 ($150 Total Investments \/ $100 Investor Capital)<\/strong> or that the Fund is running at a <strong>\u2018150 Gross.\u2019<\/strong><\/p>\n\n\n\n<div style=\"height:60px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h4 class=\"wp-block-heading\" style=\"font-size:25px\"><strong>Hedge Fund Net Exposure<\/strong><\/h4>\n\n\n\n<p style=\"font-size:18.5px\">The catch here is that <strong>Long and Short Investments do not tend to move in the same direction<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">When the <strong>market is going up<\/strong>, <strong>Longs will increase<\/strong> generate gains and the <strong>Shorts will generate losses<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"472\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-longs-offset-shorts-1-1024x472.png\" alt=\"an image showing how shorts a hedge fund portfolio offset stocks\" class=\"wp-image-50546\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-longs-offset-shorts-1-1024x472.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-longs-offset-shorts-1-300x138.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-longs-offset-shorts-1-768x354.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-longs-offset-shorts-1-400x184.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-longs-offset-shorts-1-624x288.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-longs-offset-shorts-1.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<div style=\"height:5px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\">As such, even though our <strong>Hedge Fund manager is borrowing<\/strong> in the scenario above, the <strong>shorts will likely offset the longs on any given day<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">In light of this dynamic, funds also look at a <strong>metric called \u2018Net Exposure.<\/strong>\u2019<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>We calculate Net Exposure<\/strong> by looking at the <strong>Long Exposure % &#8211; Short Exposure %<\/strong>.<\/p>\n\n\n\n<div style=\"height:30px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-net-exposure-50-percent-1-1024x576.png\" alt=\"an image showing the Hedge Fund\u2019s net Exposure at 50%\" class=\"wp-image-50373\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-net-exposure-50-percent-1-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-net-exposure-50-percent-1-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-net-exposure-50-percent-1-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-net-exposure-50-percent-1-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-net-exposure-50-percent-1-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-net-exposure-50-percent-1.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<div style=\"height:10px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\">In the example above, we have: <\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>100% Long Exposure ($100 Long Investments \/ $100 Investor Capital) and\u2026<\/strong><\/li>\n\n\n\n<li><strong>50% Short Exposure ($50 Long Investments \/ $100 Investor Capital).<\/strong><\/li>\n<\/ul>\n\n\n\n<p style=\"font-size:18.5px\">So, we would say that the Fund has <strong>50% Net exposure (100% Long Exposure \u2013 50% Short Exposure)<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">In industry terms, we would say the Fund is running at a <strong>\u201850% Net\u2019 or it\u2019s \u201850% Net Long.\u2019<\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\">So, <strong>while Hedge Funds do use Leverage<\/strong>, they are <strong>typically much less volatile<\/strong> than a <strong>similar fund that is 100% Long<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">In summary, <strong>shorting helps to offset the risk of borrowing<\/strong>.<\/p>\n\n\n\n<div style=\"height:60px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h4 class=\"wp-block-heading\" style=\"font-size:25px\"><strong>Hedge Fund Net Exposure \u2013 Market Neutral<\/strong><\/h4>\n\n\n\n<p style=\"font-size:18.5px\">Let\u2019s take our example <strong>one step further<\/strong> and assume that the Hedge Fund <strong>manager goes Long $100 twenty Stocks and simultaneously goes Short 20 different Stocks at a total value of $100<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">In that case, the <strong>Fund\u2019s Gross exposure would be 200%<\/strong>, but the fund <strong>net exposure<\/strong> <strong>would be zero<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">We would call <strong>this type of fund \u2018Market Neutral.\u2019<\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\">This type of Fund <strong>should experience very day-to-day low movement (i.e. \u2018volatility\u2019)<\/strong> relative to the market.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">With that said, it\u2019s also <strong>REALLY hard to make money this way<\/strong> because you get basically zero benefit from the movement of the market.<\/p>\n\n\n\n<div style=\"height:60px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" style=\"font-size:26px\"><strong>Hedge Fund Risk Factor #3: Derivatives<\/strong><\/h3>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Another major risk<\/strong> to consider is the use of <strong>Derivative Securities<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/derivative-definition-1024x576.png\" alt=\"an image showing the definition of a derivative\" class=\"wp-image-50219\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/derivative-definition-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/derivative-definition-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/derivative-definition-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/derivative-definition-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/derivative-definition-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/derivative-definition.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p style=\"font-size:18.5px\"><\/p>\n\n\n\n<p style=\"font-size:18.5px\">Before jumping in here, we should note that <strong>not all Hedge Funds<\/strong> <strong>make extensive use of Derivatives<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">So <strong>this risk can vary<\/strong> from negligent to significant depending on the Fund.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Just in case you are wondering, we <strong>will not be diving down<\/strong> the <strong>rabbit hole of the <a href=\"https:\/\/economictimes.indiatimes.com\/defaultinterstitial.cms\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">Black Scholes Formula<\/span><\/a><\/strong> or the intricacies of <strong>pricing <a href=\"https:\/\/www.pimco.com\/en-us\/resources\/education\/understanding-credit-default-swaps\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">Credit Default Swaps<\/span><\/a><\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">As usual, <strong>we will keep it simple<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Very briefly, derivatives are instruments that <strong>\u2018Derive\u2019 their value from another security<\/strong>.<\/p>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h4 class=\"wp-block-heading\" style=\"font-size:25px\"><strong>Example of A Derivative: Stock Options<\/strong><\/h4>\n\n\n\n<p style=\"font-size:18.5px\">As an example, <strong>a Stock Option is Derivative<\/strong> instrument.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong><em><span class=\"has-inline-color has-vivid-red-color\">Disclaimer: this is a massively simplified example of a Stock Option that disregards time value, volatility, etc.<\/span><\/em><\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\">The <strong>key thing to understand<\/strong> with Derivatives is that they <strong>allow an investor to control large dollar values<\/strong> of a security with a <strong>relatively small investment<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">For example, let\u2019s say a <strong>Stock is trading at $100.00.<\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\">And I <strong>pay $5.00 for a Call Option<\/strong> that allows me to buy into the <strong>Stock above at $95.00 per share<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">In this instance, I can <strong>control $100.00 of Stock<\/strong> with <strong>just a $5.00 investment<\/strong>.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/stock-vs-option-simple-example-1024x576.png\" alt=\"an image showing that $100 can control one share direction or 20 options indirectly\" class=\"wp-image-50378\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/stock-vs-option-simple-example-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/stock-vs-option-simple-example-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/stock-vs-option-simple-example-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/stock-vs-option-simple-example-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/stock-vs-option-simple-example-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/stock-vs-option-simple-example.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p style=\"font-size:18.5px\">So, if I <strong>have $100.00 to invest<\/strong>, I could do one of two things:<\/p>\n\n\n\n<ol style=\"list-style-type:1\" class=\"wp-block-list\">\n<li>Buy a <strong>single share at $100.00.<\/strong><\/li>\n\n\n\n<li>Buy options to <strong>control 20 shares at $5.00 per option.<\/strong><\/li>\n<\/ol>\n\n\n\n<p style=\"font-size:18.5px\">In the <strong>second example<\/strong>, I would effectively <strong>gain or lose from the movements of $2,000 worth of Stock<\/strong> (20 options * $100.00 Per Share).<\/p>\n\n\n\n<p style=\"font-size:18.5px\">We would <strong>refer to the $2,000 of Stock controlled as \u2018<a href=\"https:\/\/www.investopedia.com\/terms\/n\/notionalvalue.asp#:~:text=Notional%20value%20in%20an%20option,for%20%241.50%20x%20100%20%3D%20%24150.\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">Notional<\/span><\/a>\u2019<\/strong> in the Finance world.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">For example, you would hear someone describe the situation above as \u2018<strong><em>they bought options with $2K of notional.\u2019<\/em><\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\"><\/p>\n\n\n\n<p style=\"font-size:18.5px\">In this example, if the <strong>Stock goes up in value to $110<\/strong>, the <strong>option would be worth $15 for a cool 3.0x (200% return)<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">But, if the <strong>Stock goes below $95, you lose all of your money<\/strong>.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/gains-vs-losses-with-options-1024x576.png\" alt=\"an image showing the returns for a 10% move in the example option\" class=\"wp-image-50222\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/gains-vs-losses-with-options-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/gains-vs-losses-with-options-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/gains-vs-losses-with-options-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/gains-vs-losses-with-options-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/gains-vs-losses-with-options-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/gains-vs-losses-with-options.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<div style=\"height:20px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\">In short, <strong><u>Derivatives are just another form of Leverage<\/u><\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Beyond the <strong>leverage dynamic, Derivatives are often not as frequently traded as Stocks and Bonds, and pricing them can be incredibly complex (see Black Scholes, etc.)<\/strong>.<\/p>\n\n\n\n<div style=\"height:20px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/derivatives-equal-leverage-complexity-1024x576.png\" alt=\"an image showing that derivatives equal Leverage and complexity\" class=\"wp-image-50225\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/derivatives-equal-leverage-complexity-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/derivatives-equal-leverage-complexity-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/derivatives-equal-leverage-complexity-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/derivatives-equal-leverage-complexity-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/derivatives-equal-leverage-complexity-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/derivatives-equal-leverage-complexity.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p style=\"font-size:18.5px\">And so <strong>the combination of Leverage and complexity can end in disaster<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">The <strong>Hedge Fund industry has witnessed a variety of derivative<\/strong>&#8211;<strong>led<\/strong> blow-ups like <strong><a href=\"https:\/\/en.wikipedia.org\/wiki\/Long-Term_Capital_Management\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">Long-Term Capital Management<\/span><\/a>,<\/strong> and more recently, with <strong><a href=\"https:\/\/en.wikipedia.org\/wiki\/Archegos_Capital_Management\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">Archegos Capital Management<\/span><\/a><\/strong>.<\/p>\n\n\n\n<div style=\"height:80px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" style=\"font-size:35px\"><strong>What is a Hedge Fund? &#8211; How to Invest<\/strong><\/h2>\n\n\n\n<p style=\"font-size:18.5px\"><strong><em>Key Question(s) Covered:<\/em><\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong><em>How can I Invest in a Hedge Fund?<\/em><\/strong><\/li>\n\n\n\n<li><strong><em>Who invests in Hedge Funds?<\/em><\/strong><\/li>\n<\/ul>\n\n\n\n<p style=\"font-size:18.5px\">Now let\u2019s dive into <strong>how someone can invest in a Hedge Fund<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Before jumping in, I should note that the <strong>discussion below is specific to Regulations in the United States<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">The <strong>rules outside the US vary quite a bit,<\/strong> depending on the jurisdiction.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong><em><span class=\"has-inline-color has-vivid-red-color\">Finally, the below is in no way meant to constitute legal advice. You should consult a lawyer before attempting to invest in any Hedge Fund.<\/span><\/em><\/strong><\/p>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" style=\"font-size:26px\"><strong>Legal Requirements to Invest in a Hedge Fund<\/strong><\/h3>\n\n\n\n<p style=\"font-size:18.5px\">To begin with, to <strong>invest in a Hedge Fund<\/strong>, you will need to <strong>meet specific legal requirements<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">For an Individual in the US, you will <strong>need to be an \u2018Accredited Investor.\u2019<\/strong><\/p>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/us-accredited-investor-criteria-individual-1024x576.png\" alt=\"an image showing the criteria to become an individual accredited investor in the US\" class=\"wp-image-50386\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/us-accredited-investor-criteria-individual-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/us-accredited-investor-criteria-individual-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/us-accredited-investor-criteria-individual-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/us-accredited-investor-criteria-individual-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/us-accredited-investor-criteria-individual-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/us-accredited-investor-criteria-individual.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p style=\"font-size:18.5px\">The <strong>criteria<\/strong> to become an <strong>Accredited Investor<\/strong> are:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Earned <strong>income that exceeded $200,000 (or $300,000 together with a spouse or spousal equivalent) in each of the prior two years<\/strong>, and reasonably expects the same for the current year, <strong>OR<\/strong><\/li>\n\n\n\n<li>Has a <strong>net worth over $1 million<\/strong>, either alone or together with a spouse or spousal equivalent (excluding the value of the person\u2019s primary residence), <strong>OR<\/strong><\/li>\n\n\n\n<li>Holds in <strong>good standing a Series 7, 65 or 82 license<\/strong>.<\/li>\n<\/ul>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/us-accredited-investor-criteria-entity-1024x576.png\" alt=\"an image showing the criteria to become an accredited investor as an Entity in the US\" class=\"wp-image-50394\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/us-accredited-investor-criteria-entity-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/us-accredited-investor-criteria-entity-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/us-accredited-investor-criteria-entity-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/us-accredited-investor-criteria-entity-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/us-accredited-investor-criteria-entity-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/us-accredited-investor-criteria-entity.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p style=\"font-size:18.5px\">In addition, there are a few other <strong>ways to qualify as an entity<\/strong> (as opposed to an individual):<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Any trust<\/strong>, with <strong>total assets in excess of $5 million<\/strong>, not formed specifically to purchase the subject securities, whose purchase is directed by a sophisticated person, <strong>OR<\/strong><\/li>\n\n\n\n<li><strong>Certain entity<\/strong> with <strong>total investments in excess of $5 million<\/strong>, not formed to specifically purchase the subject securities, OR<\/li>\n\n\n\n<li>Any <strong>entity<\/strong> in which all of the <strong>equity owners are accredited investors<\/strong>.<\/li>\n<\/ul>\n\n\n\n<p style=\"font-size:18.5px\">Source: <a href=\"https:\/\/www.investor.gov\/introduction-investing\/general-resources\/news-alerts\/alerts-bulletins\/investor-bulletins\/updated-3\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Investor.gov<\/span><\/strong><\/a><\/p>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h4 class=\"wp-block-heading\" id=\"h-qualified-purchaser-requirements\" style=\"font-size:25px\"><strong>Qualified Purchaser Requirements<\/strong><\/h4>\n\n\n\n<p style=\"font-size:18.5px\">To invest in some funds, you <strong>may need to be a \u2018Qualified Purchaser,\u2019<\/strong> which is an even higher standard:<\/p>\n\n\n\n<p style=\"font-size:18.5px\">According to <a href=\"https:\/\/learn.angellist.com\/angel-investing\/accredited-investors-vs-qualified-purchasers\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Angelist<\/span><\/strong><\/a>, \u201c<em>Qualified purchaser status differs from accredited investor status in that it generally depends on the value of a person\u2019s investments, rather than their net worth, income, or credentials. Individuals <strong>generally must invest either $5M for themself or $25M for themself and other qualified purchasers to be considered a qualified purchaser<\/strong>.<\/em>\u201d<\/p>\n\n\n\n<p style=\"font-size:18.5px\">As arbitrary as they may seem, the government <strong>created these rules to protect individual investors<\/strong> following the Great Depression.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">For more on that topic, check out this <strong><span class=\"has-inline-color has-vivid-cyan-blue-color\"><a href=\"https:\/\/www.investopedia.com\/terms\/i\/investmentcompanyact.asp\" target=\"_blank\" rel=\"noreferrer noopener\">article<\/a><\/span><\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">There have been <strong>several initiatives<\/strong> to either <strong>change or circumvent these rules in<\/strong> recent year<strong>s<\/strong>. See these links for more:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong><a href=\"https:\/\/www.sec.gov\/news\/press-release\/2020-191\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">SEC Modernizes Accredited Investor Definition (August 2020)<\/span><\/a><\/strong><\/li>\n\n\n\n<li><strong><a href=\"https:\/\/www.financialpoise.com\/what-investors-need-to-know-about-equity-crowdfunding-part-1\/\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">What Investors Need to Know About Equity Crowdfunding<\/span><\/a><\/strong><\/li>\n<\/ul>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Changes to the legal requirements<\/strong> discussed above have <strong>opened the door <\/strong>for a <strong>broader group<\/strong> of investors to <strong>participate in Alternative Investments.<\/strong><\/p>\n\n\n\n<div style=\"height:60px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" style=\"font-size:26px\"><strong>Hedge Fund Investment Minimums<\/strong><\/h3>\n\n\n\n<p style=\"font-size:18.5px\">If you can <strong>clear the legal hurdles<\/strong> to invest in Hedge Funds, <strong>you\u2019ll need quite a bit of money to<\/strong> invest.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-investor-asking-about-fund-minimums-1-1024x576.png\" alt=\"A hedge fund investor asking about the minimum investment in a Hedge Fund\" class=\"wp-image-50579\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-investor-asking-about-fund-minimums-1-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-investor-asking-about-fund-minimums-1-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-investor-asking-about-fund-minimums-1-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-investor-asking-about-fund-minimums-1-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-investor-asking-about-fund-minimums-1-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-investor-asking-about-fund-minimums-1.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p style=\"font-size:18.5px\">Most funds have <strong><a href=\"https:\/\/www.forbes.com\/advisor\/investing\/how-to-invest-in-hedge-funds\/\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">minimum investments thresholds of $500,000 &#8211; $2,000,000<\/span><\/a><\/strong> or more.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">And the <strong>most sought-after funds<\/strong> <strong>close to new investors<\/strong> to ensure they can <strong>continue to generate attractive returns<\/strong> for their investors.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">In short, <strong>you will need quite a bit stashed away to get into these funds<\/strong>.<\/p>\n\n\n\n<div style=\"height:80px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" style=\"font-size:35px\"><strong>What is a Hedge Fund? &#8211; Hedge Fund Managers (+ Compensation)<\/strong><\/h2>\n\n\n\n<p style=\"font-size:18.5px\"><strong><em>Key Question(s) Covered:<\/em><\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong><em>What do Hedge Fund Managers do?<\/em><\/strong><\/li>\n\n\n\n<li><strong><em>How much are Hedge Fund managers paid?<\/em><\/strong><\/li>\n<\/ul>\n\n\n\n<div style=\"height:5px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\">Now let\u2019s dive into the <strong>day-to-day job of a Hedge Fund Manager<\/strong> to see what it looks like <strong>behind the curtain<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">As a clarification, the roles discussed in this section are <strong>specific Long\/Short Equity Hedge Funds<\/strong> but <strong>most funds roughly operate under similar structures<\/strong>.<\/p>\n\n\n\n<div style=\"height:60px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" style=\"font-size:26px\"><strong>Portfolio Manager vs. Analyst<\/strong><\/h3>\n\n\n\n<p style=\"font-size:18.5px\">There are <strong>two primary roles<\/strong> in a <strong>Long\/Short Equity Hedge Fund<\/strong>:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li>Portfolio Managers<\/li>\n\n\n\n<li>Analysts<\/li>\n<\/ul>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/Hedge-fund-positions-venn-diagram-1024x576.png\" alt=\"an venn diagram showing the typical responsibilities of Portfolio Managers and Analysts at Hedge Funds\" class=\"wp-image-50583\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/Hedge-fund-positions-venn-diagram-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/Hedge-fund-positions-venn-diagram-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/Hedge-fund-positions-venn-diagram-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/Hedge-fund-positions-venn-diagram-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/Hedge-fund-positions-venn-diagram-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/Hedge-fund-positions-venn-diagram.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<h4 class=\"wp-block-heading\" style=\"font-size:25px\"><strong>The Portfolio Manager Role<\/strong><\/h4>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Portfolio Managers (\u2018PM\u2019) manage the Fund\u2019s investment portfolio<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">In most cases, the <strong>PM\u2019s are the Hedge Funds founding Partners<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">PM\u2019s look at the bigger picture and ensure that the big picture strategy.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">They aim to <strong>build a portfolio<\/strong> that can generate <strong>outsized returns while simultaneously limiting risk relative to what would be experienced by a 100% Long-Only portfolio<\/strong>.<\/p>\n\n\n\n<div style=\"height:40px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h4 class=\"wp-block-heading\" style=\"font-size:25px\"><strong>The Analyst Role<\/strong><\/h4>\n\n\n\n<p style=\"font-size:18.5px\">In contrast, an <strong>Analyst<\/strong> digs into <strong>individual stocks<\/strong> and <strong>makes recommendations (i.e., \u2018pitches\u2019) to the Portfolio Manager on which Stocks to go Long\/Short<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Analysts <strong>base their recommendations<\/strong> on <strong>extensive company research <\/strong>and company <strong>valuations <\/strong>using tools like <span class=\"has-inline-color has-vivid-cyan-blue-color\"><a href=\"https:\/\/finance-able.com\/walk-me-through-a-dcf\/\" target=\"_blank\" rel=\"noreferrer noopener\"><strong>Discounted Cash Flow analysis<\/strong><\/a><\/span>. <\/p>\n\n\n\n<p style=\"font-size:18.5px\">There are also a variety of <strong>other titles<\/strong> at some firms, such as <strong>\u2018Sector Head,\u2019<\/strong> which is often a <strong>hybrid Portfolio Manager\/Analyst role<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>To summarize, relative to other areas<\/strong> of the Finance world, there is <strong>far less consistency in titles<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Further, <strong>Compensation does not necessarily correspond to titles<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">There are often <strong>instances<\/strong> in which <strong>Analysts can make more than their Portfolio Managers<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">So while <strong>Portfolio Managers<\/strong> are <strong>typically at the<\/strong> <strong>top of the stack<\/strong>, <strong>titles are not very clear-cut<\/strong> in the Hedge Fund world.<\/p>\n\n\n\n<div style=\"height:60px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" style=\"font-size:26px\"><strong>Hedge Fund Manager Compensation<\/strong><\/h3>\n\n\n\n<p style=\"font-size:18.5px\"><\/p>\n\n\n\n<p style=\"font-size:18.5px\"><\/p>\n\n\n\n<p style=\"font-size:18.5px\">The <strong>big attraction<\/strong> for many in the Hedge Fund world is <strong>Compensation<\/strong>.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-making-money-1-1024x576.png\" alt=\"a stick figure thinking about money\" class=\"wp-image-50419\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-making-money-1-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-making-money-1-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-making-money-1-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-making-money-1-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-making-money-1-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-making-money-1.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p style=\"font-size:18.5px\"><strong>If you can generate returns<\/strong> as a Hedge Fund investor, you can <strong>build wealth very quickly<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">The <strong>opposite is also true though<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">If you <strong>perform poorly as an Analyst<\/strong>, you will likely be asked to<strong> leave in pretty short order<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">If you <strong>perform poorly as a Portfolio Manager<\/strong>, your <strong>investors<\/strong> will begin to <strong>withdraw their capital<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">In total, the <strong>Hedge Fund world is high risk and high reward<\/strong>.<\/p>\n\n\n\n<div style=\"height:60px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h4 class=\"wp-block-heading\" style=\"font-size:25px\"><strong>Simple Hedge Fund Compensation Example<\/strong><\/h4>\n\n\n\n<p style=\"font-size:18.5px\">Let\u2019s use a <strong>simple example<\/strong> to put the <strong>potential Compensation for a Hedge Fund Manager into perspective<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">We will imagine that a <strong>Hedge Fund manager<\/strong> runs a <strong>$1 billion fund<\/strong> that generates a <strong>20% return<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">And the Fund charges a <strong>2% Management Fee<\/strong> and a <strong>20% Carried Interest Fee<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>In a single year<\/strong>, the fund will <strong>earn $20 million<\/strong> from the <strong>Management Fee<\/strong> and <strong>$40 million in Carried Interest<\/strong> ($1 billion * 20% Return = $200 Million Profit * 20% Carried Interest = $40 million).<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-fee-compensation-sample-1024x576.png\" alt=\"an image showing management fees and carried interest fees for a one billion dollar hedge fund\" class=\"wp-image-50586\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-fee-compensation-sample-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-fee-compensation-sample-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-fee-compensation-sample-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-fee-compensation-sample-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-fee-compensation-sample-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-fund-fee-compensation-sample.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p style=\"font-size:18.5px\">So, <strong>$60 million in total Compensation.<\/strong> Not bad for a year\u2019s work.<\/p>\n\n\n\n<div style=\"height:60px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h4 class=\"wp-block-heading\" style=\"font-size:25px\"><strong>Top Hedge Fund Earners<\/strong><\/h4>\n\n\n\n<p style=\"font-size:18.5px\">In the <strong>last few years<\/strong>, the <strong>top Hedge Fund founders<\/strong> have earned <strong>over $1 billion in a single year<\/strong>.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/top-hedge-fund-earners-1024x576.png\" alt=\"an image showing the top 5 Hedge Fund Manager earners for 2018 to 2020\" class=\"wp-image-50590\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/top-hedge-fund-earners-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/top-hedge-fund-earners-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/top-hedge-fund-earners-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/top-hedge-fund-earners-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/top-hedge-fund-earners-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/top-hedge-fund-earners.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p style=\"font-size:18.5px\">Below are <strong>links to the list of the top Hedge Fund earners in recent years<\/strong>:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><a href=\"https:\/\/markets.businessinsider.com\/news\/stocks\/top-15-highest-earning-hedge-fund-managers-of-2020-2021-2\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Top Hedge Fund Earners 2020<\/span><\/strong><\/a><\/li>\n\n\n\n<li><a href=\"https:\/\/www.institutionalinvestor.com\/article\/b1kwjngp2rnp9y\/Eight-Hedge-Fund-Managers-Earned-More-Than-1-Billion-Each-in-2019-Cue-the-Questions\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Top Hedge Fund Earners 2019<\/span><\/strong><\/a><\/li>\n\n\n\n<li><a href=\"https:\/\/markets.businessinsider.com\/news\/stocks\/institutional-investor-rich-list-hedge-fund-2018-2019-4\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Top Hedge Fund Earners 2018<\/span><\/strong><\/a><\/li>\n<\/ul>\n\n\n\n<p style=\"font-size:18.5px\">Now, let\u2019s step down from the stratosphere for a second and <strong>look at the \u2018typical\u2019 Hedge Fund professional<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Depending on the role, <strong>Hedge Fund Analysts<\/strong> will <strong>typically make at least $150-200K<\/strong> at the junior levels and <strong>Portfolio Managers<\/strong> routinely make <strong>over $1 million per year or more<\/strong>, with some <strong>making $5 \u2013 10 million or more<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">For some additional data points, check out:<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><a href=\"https:\/\/www.wallstreetoasis.com\/hedge-fund-industry-report\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Wall Street Oasis Hedge Fund Compensation Report<\/span><\/strong><\/a><\/li>\n\n\n\n<li><a href=\"https:\/\/online.hfm.global\/insight\/compensation-survey-2020\/\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">HFM 2020 Compensation Survey<\/span><\/strong><\/a><\/li>\n\n\n\n<li><a href=\"https:\/\/www.institutionalinvestor.com\/research\/8866\/All-America-Buy-Side-Compensation-Hedge-Fund-Cut\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Institutional Investor Average Pay &#8211; 2018<\/span><\/strong><\/a><\/li>\n\n\n\n<li><a href=\"https:\/\/sumzero.s3.amazonaws.com\/public\/uploads\/specialpublications\/SumZero2017CompensationReport_2ed40648db.pdf\" target=\"_blank\" rel=\"noreferrer noopener\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Sumzero 2017 Compensation Report<\/span><\/strong><\/a><\/li>\n<\/ul>\n\n\n\n<p style=\"font-size:18.5px\">With all of the above said, <strong>Compensation<\/strong> in the Hedge Fund world <strong>varies massively year-to-year depending on the returns generated by the firm<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">In short, <strong>there is a lot of opportunities<\/strong>, but it\u2019s a <strong>long, hard road. Very few make it to the top<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Due to the <strong>steep legal and minimum investment hurdles<\/strong>, the vast majority of the dollars invested in Hedge Funds come from large Pensions, University Endowments, and Foundations. (More on that <strong><span class=\"has-inline-color has-vivid-cyan-blue-color\"><a href=\"https:\/\/www.thebalance.com\/who-invests-in-hedge-funds-and-why-3306239\" target=\"_blank\" rel=\"noreferrer noopener\">here<\/a><\/span><\/strong>)<\/p>\n\n\n\n<div style=\"height:80px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" style=\"font-size:35px\"><strong>Hedge Funds vs. Private Equity vs. Mutual Funds<\/strong><\/h2>\n\n\n\n<p style=\"font-size:18.5px\"><strong><em>Key Question(s) Covered:<\/em><\/strong><\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong><em>What is the difference between a Hedge Fund and Private Equity?<\/em><\/strong><\/li>\n\n\n\n<li><strong><em>What is the difference between a Hedge Fund and a Mutual Fund?<\/em><\/strong><\/li>\n<\/ul>\n\n\n\n<div style=\"height:1px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<p style=\"font-size:18.5px\">Now let\u2019s look at a <strong>brief comparison<\/strong> of <strong>Hedge Funds vs. Private Equity Funds and Mutual Funds<\/strong>.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-vs-private-equity-vs-mutual-funds-1-1024x576.png\" alt=\"An images showing questions marks on the differences between Hedge Funds, Mutual Funds and Private Equity\" class=\"wp-image-50407\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-vs-private-equity-vs-mutual-funds-1-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-vs-private-equity-vs-mutual-funds-1-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-vs-private-equity-vs-mutual-funds-1-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-vs-private-equity-vs-mutual-funds-1-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-vs-private-equity-vs-mutual-funds-1-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-vs-private-equity-vs-mutual-funds-1.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<div style=\"height:60px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" style=\"font-size:26px\"><strong>Hedge Funds vs. Private Equity<\/strong><\/h3>\n\n\n\n<p style=\"font-size:18.5px\">As the name suggests, <strong>Private Equity (or &#8216;<a href=\"https:\/\/finance-able.com\/walk-me-through-an-lbo\/\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">LBO<\/span><\/a>&#8216;) funds<\/strong> typically <strong>invest in private, illiquid assets<\/strong>.<\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-vs-private-equity-1024x576.png\" alt=\"an image showing the differences between Hedge Funds and Private Equity Funds\" class=\"wp-image-50231\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-vs-private-equity-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-vs-private-equity-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-vs-private-equity-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-vs-private-equity-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-vs-private-equity-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-vs-private-equity.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p style=\"font-size:18.5px\">PE Investments can <strong>range from partial ownership<\/strong> in young, privately-held businesses to <strong>full ownership<\/strong> of a company.<\/p>\n\n\n\n<p style=\"font-size:18.59px\">In contrast, regardless of strategy, the <strong>\u2018typical\u2019 Hedge Fund<\/strong> invests in much <strong>more liquid securities<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">With that said, the <strong><u>lines between the two are often quite blurry<\/u><\/strong>. &nbsp;<\/p>\n\n\n\n<p style=\"font-size:18.5px\">There are <strong>many Hedge Funds<\/strong> that make <strong>private investments<\/strong> (and vice versa).<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Regardless of the investments made, <strong>Private Equity and Hedge Funds<\/strong> are <strong>more similar than they are different<\/strong> regarding legal structure and fees.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">Both <strong>Private Equity funds and Hedge Funds<\/strong> typically utilize the <strong>partnership structure<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">And most <strong>charge fees based on some variant of \u2018<a href=\"https:\/\/www.divestopedia.com\/definition\/820\/2-and-20-fee-structure\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">2 and 20<\/span><\/a>\u2019 fee structure discussed above<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">For a <strong>deeper dive<\/strong> into the different <strong>types of Private Equity funds<\/strong>, check out our highly-ranked <strong><a href=\"https:\/\/finance-able.com\/private-equity-vs-venture-capital\/\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">Private Equity vs. Venture Capital<\/span><\/a><\/strong> article.<\/p>\n\n\n\n<div style=\"height:60px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h3 class=\"wp-block-heading\" style=\"font-size:26px\"><strong>Hedge Funds vs. Mutual Funds<\/strong><\/h3>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Equity Mutual Funds<\/strong> are <strong>very similar<\/strong> to <strong>Equity Hedge Funds<\/strong> in that they both <strong>invest in stocks<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><strong>But that\u2019s where the similarities end.<\/strong><\/p>\n\n\n\n<p style=\"font-size:18.5px\">Below is a <strong>brief summary<\/strong> of the <strong>key differences<\/strong> between <strong>Hedge Funds and Mutual Funds<\/strong>.<\/p>\n\n\n\n<p style=\"font-size:18.5px\"><\/p>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-vs-private-equity--1024x576.png\" alt=\"an image showing the differences between Hedge Funds and Equity Mutual Funds\" class=\"wp-image-50232\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-vs-private-equity--1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-vs-private-equity--300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-vs-private-equity--768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-vs-private-equity--400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-vs-private-equity--624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/hedge-funds-vs-private-equity-.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p style=\"font-size:18.5px\"><\/p>\n\n\n\n<p style=\"font-size:18.5px\">For a <strong>deeper dive<\/strong> into the differences between these funds, check out our highly-ranked <a href=\"https:\/\/finance-able.com\/hedge-fund-vs-mutual-fund\/\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Hedge Funds vs. Mutual Funds<\/span><\/strong><\/a> article.<\/p>\n\n\n\n<div style=\"height:80px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" style=\"font-size:35px\"><strong>Wrap-Up: What is a Hedge Fund?<\/strong><\/h2>\n\n\n\n<figure class=\"wp-block-image size-large\"><img loading=\"lazy\" decoding=\"async\" width=\"1024\" height=\"576\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/stick-figure-understanding-what-is-a-hedge-fund-1024x576.png\" alt=\"a stick figure sitting at a desk understanding the question, 'What is a Hedge Fund?&quot;\" class=\"wp-image-50598\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/stick-figure-understanding-what-is-a-hedge-fund-1024x576.png 1024w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/stick-figure-understanding-what-is-a-hedge-fund-300x169.png 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/stick-figure-understanding-what-is-a-hedge-fund-768x432.png 768w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/stick-figure-understanding-what-is-a-hedge-fund-400x225.png 400w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/stick-figure-understanding-what-is-a-hedge-fund-624x351.png 624w, https:\/\/finance-able.com\/wp-content\/uploads\/2021\/11\/stick-figure-understanding-what-is-a-hedge-fund.png 1280w\" sizes=\"auto, (max-width: 1024px) 100vw, 1024px\" \/><\/figure>\n\n\n\n<p style=\"font-size:18.5px\"><strong>Hopefully<\/strong>, you now have a <strong>much better understanding of<\/strong> how Hedge Funds work.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">So the next time someone asks, \u2018<em><strong>What is a Hedge Fund?<\/strong><\/em>\u2019, you can confidently explain their inner workings.<\/p>\n\n\n\n<p style=\"font-size:18.5px\">We hope you found this article helpful and would love to answer your questions (or hear any comments) in the section below. <strong>We\u2019d love to hear from you!<\/strong><\/p>\n\n\n\n<div style=\"height:80px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" style=\"font-size:35px\"><strong>About the Author<\/strong><\/h2>\n\n\n<div class=\"wp-block-image\">\n<figure class=\"alignleft size-full is-resized\"><img loading=\"lazy\" decoding=\"async\" width=\"500\" height=\"500\" src=\"https:\/\/finance-able.com\/wp-content\/uploads\/2020\/12\/MK-Photo.jpg\" alt=\"Picture of Mike Kimpel, Founder of Finance|able\" class=\"wp-image-26350\" style=\"width:266px;height:266px\" srcset=\"https:\/\/finance-able.com\/wp-content\/uploads\/2020\/12\/MK-Photo.jpg 500w, https:\/\/finance-able.com\/wp-content\/uploads\/2020\/12\/MK-Photo-300x300.jpg 300w, https:\/\/finance-able.com\/wp-content\/uploads\/2020\/12\/MK-Photo-100x100.jpg 100w, https:\/\/finance-able.com\/wp-content\/uploads\/2020\/12\/MK-Photo-150x150.jpg 150w, https:\/\/finance-able.com\/wp-content\/uploads\/2020\/12\/MK-Photo-50x50.jpg 50w\" sizes=\"auto, (max-width: 500px) 100vw, 500px\" \/><\/figure>\n<\/div>\n\n\n<p style=\"font-size:17px\"><a href=\"https:\/\/finance-able.com\/about\/\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Mike Kimpel<\/span><\/strong><\/a> is the <strong>Founder and CEO<\/strong> of <strong>Finance|able<\/strong>, a next-generation Finance Career Training platform. Mike has worked in Investment Banking, Private Equity, Hedge Fund, and Mutual Fund roles during his career.<\/p>\n\n\n\n<p style=\"font-size:17px\">He is an <strong>Adjunct Professor<\/strong> in <strong>Columbia Business School&#8217;s <a href=\"https:\/\/www8.gsb.columbia.edu\/valueinvesting\/coursesfaculty\/valueinvestingprogram\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\">Value Investing Program<\/span><\/a><\/strong> and leads the Finance track at <a href=\"https:\/\/www.accessdistributed.org\/\" target=\"_blank\" rel=\"noreferrer noopener\"><span class=\"has-inline-color has-vivid-cyan-blue-color\"><strong>Access Distributed<\/strong><\/span><\/a>, a non-profit that creates access to top-tier Finance jobs for students at non-target schools from underrepresented backgrounds.<\/p>\n\n\n\n<p><\/p>\n\n\n\n<p><\/p>\n\n\n\n<div style=\"height:60px\" aria-hidden=\"true\" class=\"wp-block-spacer\"><\/div>\n\n\n\n<h2 class=\"wp-block-heading\" style=\"font-size:35px\"><strong>Frequently Asked Questions<\/strong><\/h2>\n\n\n\n<div class=\"schema-faq wp-block-yoast-faq-block\"><div class=\"schema-faq-section\" id=\"faq-question-1635908510981\"><strong class=\"schema-faq-question\">What does a hedge fund do?<\/strong> <p class=\"schema-faq-answer\">A <strong>Hedge Fund is a pooled investment vehicle <\/strong>that invests on behalf of a group of investors. The<strong> key differentiator<\/strong> for Hedge Funds (vs other types of funds) is that they &#8216;<strong>hedge&#8217; their portfolio by going Short<\/strong>. <\/p> <\/div> <div class=\"schema-faq-section\" id=\"faq-question-1635954884380\"><strong class=\"schema-faq-question\">How to invest in a hedge fund?<\/strong> <p class=\"schema-faq-answer\">To invest in a Hedge Fund in the United States you typically need to be an <strong>Accredited Investor or Qualified Purchaser<\/strong>. You will also typically <strong>need to invest US$1 million <\/strong>or more to meet the <strong>minimum investment requirement<\/strong> of a Hedge Fund.<\/p> <\/div> <div class=\"schema-faq-section\" id=\"faq-question-1635954897421\"><strong class=\"schema-faq-question\">What does a hedge fund manager do?<\/strong> <p class=\"schema-faq-answer\">Hedge Fund managers <strong>oversee a portfolio of Long and Short investments<\/strong> and the <strong>day-to-day operations of the Hedge Fund<\/strong>. <\/p> <\/div> <div class=\"schema-faq-section\" id=\"faq-question-1635954900363\"><strong class=\"schema-faq-question\">How do hedge funds make money?<\/strong> <p class=\"schema-faq-answer\">Hedge Funds typically charge two fees: 1) a <strong>2% annual Management Fee<\/strong> on the money they manage and 2) a <strong>20% cut of the profit (&#8216;Carried Interest&#8217;) <\/strong>the fund generates for investors.<\/p> <\/div> <\/div>\n\n\n\n<h2 class=\"wp-block-heading\"><strong>Related Links<\/strong><\/h2>\n\n\n\n<ul class=\"wp-block-yoast-seo-related-links yoast-seo-related-links\">\n<li><a href=\"https:\/\/finance-able.com\/hedge-fund-vs-mutual-fund\/\"><strong><span class=\"has-inline-color has-vivid-cyan-blue-color\">Hedge Funds vs Mutual Funds Made Easy \u2013 Definitive Guide (2021)<\/span><\/strong><\/a><\/li>\n\n\n\n<li><a href=\"https:\/\/finance-able.com\/buyside-vs-sellside\/\"><span class=\"has-inline-color has-vivid-cyan-blue-color\"><strong>Buyside vs Sellside<\/strong><\/span><\/a><\/li>\n\n\n\n<li><a href=\"https:\/\/finance-able.com\/private-equity-vs-venture-capital\/\"><span class=\"has-inline-color has-vivid-cyan-blue-color\"><strong>Private Equity vs Venture Capital &#8211; The Ultimate Guide (2021 Update)<\/strong><\/span><\/a><\/li>\n<\/ul>\n\n\n<div class=\"yoast-breadcrumbs\"><span><span><a href=\"https:\/\/finance-able.com\/\">Home<\/a><\/span> \u00bb <span class=\"breadcrumb_last\" aria-current=\"page\">What is a Hedge Fund? \u2013 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    "rendered": "<p>&#8216;What is a Hedge Fund?&#8217; is a question that usually ends with more confusion than clarity. In this guide &#8211; written by an industry insider who worked at a multi-billion dollar Hedge Fund \u2013 we make it simple.&nbsp; In this article, you will learn: TL;DR Want To Learn More About Finance? Check out all of&#8230;<\/p>\n",
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