Generally speaking, a hedge fund is a private, open-ended company formed for the purpose of investing. It is differentiated from other types of investment strategies by its organization, its membership, its activities and its compensation scheme.
Hedge Funds Are Privately Organized Companies
Most commonly, hedge funds are organized privately, though there are jurisdictions in which investment companies that resemble hedge funds in form or function may be accessible to the general public. These more readily accessible structures include UCITS in the European Union, structured notes or various forms of insurance participation.
Organizing Hedge Funds
Organizing as a private company gives the sponsor of the hedge fund flexibility in terms of the investment strategies the fund can employ. In addition, in targeting sophisticated, wealthy investors and institutions by raising funds via a private placement, the hedge fund qualifies for exemption from securities and mutual fund registration with the local jurisdiction.
In the United States, there are two types of safe harbor from prospectus registration requirements for the securities offerings of interests in the hedge fund under the Investment Company Act of 1940: Section 3(c)(1) and Section 3(c)(7). To merit the benefit of these legal carve-outs, the hedge fund must restrict itself to soliciting only a particular type of investor and there are limits to the number of investors in the fund under each proviso.
In the case of a 3(c)(1) fund, the interests may be offered only to “accredited investors” and the fund cannot have more than 100 of these accredited investors. An accredited investor is defined in the US Investment Company Act of ’40 as someone, individually or jointly with their spouse, having a net worth or annual income above a defined threshold. The minimum net worth for accredited investors is $1 million, individually or jointly. The minimum annual income is $200,000 ($300,000 for married couples) in each of the past two years with the expectation of earning at least that amount in the next year. There are also other types of institutional accredited investors.
For a 3(C) (7) fund, the hedge fund may offer its interests under a private placement to so-called “qualified purchasers”, defined (again, in the US Investment Company Act of ’40) as a natural person who owns at least $5 million in investments (securities and other permitted assets held for investment purposes). Again, there is a restriction on the number of qualified purchasers in a 3(c )(7) fund, with the limit imposed at 500 investors.
Hedge Funds Have Greater Flexibility With Respect To Investment Strategy
Restrictions and Regulations
There are a number of restrictions imposed on traditional, regulated investment vehicles such as mutual funds. These include limits on financial leverage, on the types of investments the fund can make, and the way in which the fund manages risk…read more
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A bond is a “security” which gives the holder a financial claim on the issuer. This claim protects the holder in circumstances in which the issuer is unable to pay the amount due. It is made formal by the “trust indenture,” a legal document that specifies all of the bond characteristics and the legal rights and obligations of all the parties to the agreement. Bonds are “fixed income” investments that have a fixed interest rate or coupon, payable on the principle amount, usually $100.
When people refer to “stocks” or the “stock market,” they usually mean common shares. A common share is a financial security that gives the holder an ownership claim in a company. Stocks gives the holder the right to receive dividend payments and a vote at the company’s annual meeting. The shareholders have specific rights under both corporate law and the company’s bylaws. Common shares are also referred to as “equity securities” or “equities” alluding to the accounting term “Owner’s Equity.”
Derivatives are financial securities whose value is derived from another “underlying” financial security. Options, futures, swaps, structured notes are all examples of derivative securities. Derivatives can be used for hedging, protecting against financial risk, or can be used to speculate on the movement of commodity or security prices, interest rates or the levels of financial indices. The valuation of derivatives makes use of the statistical mathematics of uncertainty, which is very complex.
Generally speaking, consumer finance refers to everyday financial issues that one may encounter, or general investment advice. This section contains information on a number of common financial questions and concepts that can affect anyone, regardless of their financial expertise.
A mutual fund is a financial vehicle that allows a number of investors to pool their money and have it jointly managed by a professional money manager. Individual mutual funds are divided into separate units and each holder is entitled to a share of the fund proportional to their investment. Each “unit holder” has the right to their share of the assets of the fund and any income that the fund earns.
A Hedge Funds are privately-managed investments funds. They have a wide-ranging scope regarding the types and breadth of investments they can have. A hedge fund is a financial entity used for pooling the capital of a group of individual investors. Each hedge fund has its own unique characteristics and preferences and is designed to invest jointly in a particular market. Hedge funds employ strategic investment practices and operate under a designated professional advisor who is compensated with both a management fee and a performance fee.