LO 71.1: Describe the characteristics of hedge funds and the hedge fund industry, and compare hedge funds with mutual funds.
There are important distinctions between hedge funds and mutual funds. Hedge funds are private, much less regulated investment vehicles, not available to the general public. On the other hand, mutual funds are more structured and regulated. Hedge funds are highly leveraged, and managers obtain profits from both long and short positions. Hedge fund managers tend to take large bets based on perceived relative price discrepancies of assets.
Privacy is a hallmark of hedge funds. There is little transparency in the hedge fund industry because managers do not want their methods copied. A hedge fund charges a fixed management fee plus a healthy share of new profits from the fund, generally around 10- 20%.
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