Who can invest in hedge funds?

Hedge funds often define a minimum capital to be entrusted to them. this is often generally around 50,000 euros. it's therefore aimed toward a particular sort of investor.

  • Wealthy people,
  • Banks,
  • Financial institutions,
  • Pension funds.

How do hedge funds work?

Hedge funds operate the idea of a partnership between investors and fund managers. The latter convince their prospects of the reliability of their best online stock broker uk t approach. When an investor places their money during a hedge fund, they're generally charged two sorts of fees: management fees and performance fees . we'll discuss this subject later.

The characteristics of a hedge fund

Some hedge funds only accept capital from accredited investors .

  • Depending on their objectives, they become involved altogether markets and derivatives. they will use complex strategies.
  • They use leverage, borrowing additional funds to get positive alpha .
  • Most hedge funds apply the “2 and 20” pricing structure. that's to mention 2% of management
  • fees and 20% of performance fees.
  • Leverage

Hedge funds use leverage to spice up their profitability within the markets. they will do that in several ways:

UK Trading on margin : trading on margin involves borrowing funds, so as to be ready to open larger positions. The hedge fund can borrow these funds from investment banks.

For example, with a margin of € 500, he can borrow € 500 more from the investment bank, to shop for a share at € 1,000. If the action goes up to € 2,000, he earns € 1,000 rather than € 500, which he would have received if he had only used his starting € 500.

The line of credit : the hedge fund can borrow from a bank, to possess more funds to barter . The principle is that the same as for trading on margin.

Tariff structure

As we've seen, the industry standard for commission is “2 and 20”. The hedge fund charges 2% fees per annum , taken from assets under management, no matter market performance and conditions. additionally to those management fees, the investor pays performance fees, when the hedge fund has succeeded in making a financial gain on its investment. These performance fees are generally 20%.