Two Minute Tuesdays: Intro to Hedge Funds

What is a Hedge Fund?

• Hedge: To protect money
• Fund: A pool of money
• Initially meant to protect money by balancing investments
• Over time, hedge funds started taking more risks

Evolution of Hedge Funds

• Originally aimed to protect clients' money
• Now, often involved in risky bets and investments in both market directions
• Reputation: Got a bad name due to high-risk strategies and significant losses

How Hedge Funds Work

• Clients: Wealthy individuals, companies, corporate pension funds
• Investments: In financial markets with high levels of risk
• Regulation: Less regulated, average people can't easily invest
• Eligibility: Need to be a certified investment professional

Use of Leverage in Hedge Funds

• Leverage: Borrowing money to magnify trade returns
• Example: Client's £100 + Borrowed £1000 = £1100 total investment
• Returns: Potentially larger returns (e.g., £5000-£10,000)
• Risks: High leverage can also mean massive losses

Types of Investments

• Different hedge funds focus on various asset classes
  • Fixed Income
  • Equity Markets
  • Real Estate
• Know the hedge fund's investment focus if considering a career

Fee Structure

• Typical Fees: 2% management fee, 20% performance fee
• Management Fee (2%): For managing the investments
• Performance Fee (20%): If reaching a specific return level, incentivizes high performance

Summary

• Hedge Funds: High risk, high reward investments
• Important Considerations: Leverage, types of investments, fee structure
• Next topic: What is Asset Management?