CFA Level 1 - Alternative Investments
Hedge Fund Objectives
One thing all hedge funds have in common is their search for addition alpha or absolute returns. This is the objective of a hedge fund: absolute returns and making money for investors. This will be accomplished by using whatever type of market strategies the hedge fund believes will give it an advantage.
Legal Structure of a Hedge Fund
Hedge funds generally rely on Sections 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940 to avoid registration and regulation as investment companies. Hedge fund legal structure is typically in the form of a limited partnership, as a limited liability corporation in the
- Funds are limited to 1,009 partners who must be "accredited investors" and the fund may not advertise.
- Some funds are structured under section 3(c)(7) of the Investment Company Act and are exempt form most SEC regulations.
- The minimum investment is typically $200,000 but that is beginning to change to the lower side of that number.
Fee Structure of a Hedge Fund
Fees are the lifeblood of a hedge fund. The manager usually gets a base management fee based on the value of the assets in the fund, such as 1% of the fund's assets. Managers also receive an incentive fee based on their performance that typically ranges between 15-30%. This fee typically occurs after the fund has reached the target return for investors. For any profit generated after that mark, the fund would receive the 15-30%.