What is hedge Fund Management?

A HEDGE FUND is a private investment fund charging a performance fee and typically open to only a very limited range of qualified investors. In the United States, hedge funds are open to accredited investors only. Because of this restriction, they are usually exempt from any direct regulation by the SEC, NASD and other regulatory bodies. A HEDGE FUND's activities are limited only by the contracts governing the particular fund, so they can follow complex investment strategies, being long or short assets and entering into futures, swaps and other derivative contracts. They often hedge their investments against adverse moves in equity and other markets, because a common objective is to generate returns that are not closely correlated to those of the broader financial markets. In most countries hedge funds are prohibited from marketing to non-accredited investors, unlike regulated retail investment funds such as mutual funds and pension funds. As hedge funds are essentially a private pool of managed assets, and as their public access is commonly restricted by the government, they have little to no incentive to release their private information to the public. Inarguably private entities, hedge funds have a corresponding reputation for secrecy, and less is known about the methods and activities of hedge funds than about publicly-accessible "retail" funds. However, since hedge fund assets can run into many billions of dollars, and thus their sway over markets—whether they succeed or fail—is substantial, there have been calls for regulation of these private investment funds. FEES Usually the hedge fund manager will receive both a management fee and a performance fee. As with other investment funds, the management fee is computed as a percentage of assets under management. Management fees might typically be 1.5% or 2.0%. PERFORMANCE FEES Performance fees, which give a share of positive returns to the manager, are one of the defining characteristics of hedge funds. The performance fee is computed as a percentage of the fund's profits, counting both paper profits and actual realized trading profits. Performance fees exist because investors are usually willing to pay managers more generously when the investors have themselves made money. For managers who perform well the performance fee is extremely lucrative. Typically, hedge funds charge 20% of gross returns as a performance fee, but again the range is wide, with highly regarded managers demanding higher fees. In particular, Steven Cohen's SAC Capital Partners charges a 50% incentive fee (but no management fee) and Jim Simons' Renaissance Technologies Corp. charged a 5% management fee and a 44% incentive fee in its flagship Medallion Fund before returning all investors' capital and running solely on its employees' money. Managers argue that performance fees help to align the interests of manager and investor better than flat fees that are payable even when performance is poor. However, performance fees have been criticized by many people including notable investor Warren Buffett for giving managers an incentive to take risk, possibly excessive risk, as opposed to high long-term returns. In an attempt to control these problems, fees are usually limited by high water marks and sometimes by hurdle rates.