Investing 101
1:48
What are Hedge Funds? | Hedge Funds Explained | Titan
Hedge funds may be for the wealthy and big institutions, but in this 2 minute video, Titan's Emily Cherkassky explains all about them.
Video Transcript
The term hedge fund stems from the fact that early funds would hedge their downside risk. However, the common thread among hedge funds today is that they're private pooled investments collected from institutions and wealthy individuals that can be invested in a wide variety of assets to meet higher risk investment goals and also potentially lead to higher returns. Hedge funds aren't available to everyone, and individuals have to be accredited to participate. To be an accredited investor and invest in a US hedge fund you typically have to have a liquid net worth of at least one million dollars or an annual income of more than $200,000 for the last two years of your income. Some funds may set even higher thresholds to let investors in. Hedge fund manager compensation also adds to their allure. The industry standard fee that hedge funds charge is thought to be a 2 and 20 fee structure.
Meaning that they charge 2% for managing the money and 20% for performing over a certain hurdle. So, for example, if a hedge fund manages one billion dollars the manager is paid 2% of that one billion, which is 20 million dollars. And let's say it generates a 25% return of 250 million dollars. Then the manager would get 20% of the returns equaling 50 million dollars. A 25% return isn't easy to achieve, but even without outperforming, large hedge fund managers can generate significant revenue off of a 2% management fee alone.
One last fun fact. If you've ever seen the show Billions there's a character named Wendy who acts as a shrink for the hedge fund analyst. This is a real thing that hedge funds do. It's actually quite common for funds to have psychological resources for their traders since they're often making really high stakes investment decisions.
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