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 By Julia Lundstrom, CFP® | The Traders Wire

Julian Robertson, a Wall Street investor, died earlier this week at his home in Manhattan. He was 90 years old when this opened.

What makes this man prominent was how this man, and a few others, managed to push short-selling into the mainstream as well as help create the modern hedge fund industry. 

What Are Hedge Funds

Hedge fund typically defines a pool of funds that the manager controls. A hedge fund often creates hedged bets by investing a portion of its assets in the opposite direction of the fund’s focus to help offset any losses in its core holdings. 

Often, they take on riskier strategies, leveraged assets, and a variety of derivatives such as options and futures. The reputation of the manager is also a key factor in finding investors. 

How Do You Earn From Hedge Funds?

Similar to mutual and exchange-traded funds, hedge funds are also pools of money that are contributed by many investors who aim to earn a profit for themselves and their clients. Hedge funds always aim for the greatest possible returns but also take on more significant risks while trying to achieve them. 

An individual who can afford to diversify into a hedge fund will do so by taking into consideration key factors such as:

  • The reputation of its manager
  • The specific assets in which the fund is invested
  • The unique strategy in employ.

It will benefit the potential investor to also read the hedge fund’s documents and agreements. In doing so, the investor will understand the level of risk involved in the hedge fund’s strategies and what they equate as their personal investing goals, time horizons, and risk tolerance. 

What’s In It For The Managers? 

There is a standard “2 and 20” fee system that hedge funds employ today.  This involves a 2% management fee and a 20% performance fee.

The management fee charged to investors is based on the net asset value of each investor’s shares, so an investment of $1,000,000, for example,  will call for an annual management fee of $20,000.

On top of this, managers can make money through performance fees. If an investment of $10million increases to $12 million in one year, then $400,000 is owed to the fund as the performance fee.

Julia Lundstrom

About the author

Julia Lundstrom has been a Certified Financial Planner® since 2003, managing over $60 million of assets before selling her practice in 2009. Before that, she was an investment manager for a Silicon Valley venture fund. After 3 market crashes in her career, she is her to help guide you in the markets for The Traders Wire.

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