Hedge Funds

Hedge Funds

These are pools of money like mutual funds, but organized as partnerships.

They tend to carry substantial amounts of leverage and invest in illiquid corners of the market.

Some of the leverage comes from positions in derivative instruments such as futures and options.

Illiquid essentially implies that exiting large positions is difficult without offering substantial price discounts.

Unlike mutual funds therefore, hedge funds frequently require that investors commit to leave their invested capital in that fund for a long period of
time, known as a “lock-up” period. Multi-year lock-up periods are not uncommon.

The standard cost structure is known as 2 and 20, which accrues to the managers. It refers to 2% of assets as a management fee and 20% of
the performance generated by the fund.

Institutional Investor Magazine offers a perspective on the winner and losers among hedge funds in 2018. A glance at the
portfolio composition will provide a sense for the type of investment products in which these funds are concentrated.