I recently read that there are 98 new hedge funds with more than $1 billion AUM.
So what’s all the hype about?? What makes hedge funds so special?
OPEN VS CLOSED FUNDS
To understand the biggest reason why hedge funds are different, you need to know a little bit more about fund structure…
You might have heard open and closed funds regarding an ETF or a mutual fund … but those are public funds, right?
On this blog – we focus on the private funds! But let’s disscuss the difference.
A large majority of funds are what we call close ended funds.
Closed funds typically invest into more illiquid assets. And because of this, they often have long lock up periods.
Which basically means they come to you and say,
“Now that you’ve invested with us – Your capital will be unavailable to you for 7-12 years. If you need to withdraw it – you’ll be subject to some pretty hefty fines.”
For example: let’s say a particular fund has a 10 year lock-up period. Years 0-2 they will be raising capital, years 2-5 investing that capital, and then let it grow years 6-10.
Investors can’t pull their investment out at any point during those 10 years in a close ended funds, unless they want to pay some big fees.
But when that fund reaches maturity – then all the capital (plus interest) will be returned to them.
On the contrary, hedge funds typically run through an OPEN ENDED model.
This structure allows money to come in and out depending on the desires of the investors.
If new investors want to come into the fund, then the fund can just issue more shares.
Tip: investors should be cautious about share dilution in open ended funds.
Just because the fund is open ended, that doesn’t mean an investor can just hop in out of the fund on any given day…
Hedge funds, as defined in their offering documents, will have investment windows on a monthly, quarterly, or semi annually period.
Held to a Benchmark
All funds are theoretically held to the benchmark of “beating the market”.
Hedge funds, however, are trading right alongside the S&P 500 in the public markets. So you not only have to outperform the market, but you need beat the S&P(if that’s your benchmark) on an after fee basis.
Another differentiating element in hedge funds is that the management fees are usually higher on these types of funds.
For example: Jim Simmons is the manager of $80 billion at Renaissance…but his fees? A little outrageous. To invest in his fund it’s a 44% performance fee and a 5% management fee.
Now, we realize you’re not Jim… So we unorthodoxly suggest, especially while building your track record for a newer fund manager, that you don’t charge a management fee.
In my course we break this down extensively:
- Key considerations when starting funds
- How/why you shouldn’t charge a management fee
- And about 132 more videos, all about funds 🙂
If you have any questions, feel free to hop on my free webinar.
Thanks for the read!
DISCLAIMER: This content is for educational and informational purposes only. It is not to be taken as tax, financial, or legal advice. You should always consult a legal professional before taking action. Furthermore, this is not a recommendation to buy or sell any security. The content is solely just the opinion of the authors.