The term hedge fund is generally ascribed to Alfred Winslow Jones, who coined it in the late 1940‘s to describe his innovation of offsetting (hedging) long positions in undervalued equities with other short positions.
Nowadays the term is used to describe funds more by their structure than by any particular investment strategy.
Generally these investment funds are set up as limited partnerships with the manager acting as the general partner, while the investors participate as limited partners.
Typical investors in hedge funds are sophisticated high net worth individuals, institutions, pensions, funds of funds and other qualiﬁed clients.
Yes, hedge funds are not permitted to accept partners who are not “qualiﬁed clients”.
An investor must meet one of the following criteria:
- Either singly or jointly with spouse have a combined net worth above $1,500,000
- Have had an annual personal income in excess of $200,000 in the previous two years, and reasonable expectation of repetition in the current calendar year.
- Have had jointly with spouse an annual income in excess of $300,000 in the previous two years, and can reasonably expect to repeat this in the current calendar year.
The minimum investment is set by the general partner, and may typically amount to $250,000 or $500,000. However, there are many hedge funds that require a minimum investment of $1,000,000 and more.
Lock-up periods refer to the length of time that investors must hold their assets in the fund before they can be removed.
Hedge funds generally set a “management fee“ of 1% to 2% of assets annually, and another charge known as the “incentive fee” which is normally set at 20% -25% of annual proﬁts.
Many funds respect a “high-water mark” which ensures that no incentive fees will be collected from an investor who loses money within a given period until the sustained losses have been recuperated.
Another popular limitation known as the „benchmark“ or “preferred return“,
restricts the fund from collecting incentive fees before a certain proﬁt is achieved.