Advantages And Disadvantages Of Hedge Funds

Hedge Fund is an offshore investment fund, formed as private limited partnership, engages in speculation by borrowing capital from pool of investment. They are considered to be very risky investments as on many occasions where lot of investors have pooled money in high-performing fund without regard how performance has been achieved and how sustainable it would in future. About 66% of global hedge fund assets come from institutional investors such as pension funds, non-profit endowments.

Structurally, a hedge fund has some similarities to a mutual fund. For example, just like a mutual fund, a hedge fund is a pooled investment vehicle that makes investments in equities, bonds, options and a variety of other securities. Also as mutual fund is

Unlike management fees, which an investor pays based on the Net Asset Value of its interest in the fund, an investor pays a performance fee only if the Net Asset Value of its interest in the fund increases over a specified time period. Simply put, if the fund does not make money for its investors, managers do not get a performance fee. Most if not all hedge funds charge an incentive fee of anywhere between 10-20% of fund profits, and some hedge funds have even gone as high as 50%. The idea of the incentive fee is to reward the hedge fund manager for good performance, and if the fund's performance is attractive enough, investors are willing to pay this fee. For example, if a hedge fund manager generates a 20% return per year, after management fee, the hedge fund manager will collect 4% of those profits, leaving the investor with a 16% net return. In many cases, this is an attractive return despite the high incentive fee, but with more mediocre managers entering the industry in search of fortune, investors have more often than not been disappointed with net returns on many

There are four broad groups of hedge fund strategies: arbitrage, event-driven, equity-related and macro. The first two groups in many cases attempt to achieve returns that are uncorrelated with general market movements, where managers try to find price discrepancies between related securities, using derivatives and active trading based on computer driven models and extensive research. The second two groups are impacted by movements in the market, and they require intelligent