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Starting a Hedge Fund – How Hedge Funds Make Money

Are you about starting a hedge fund business and you want to know how they work? If YES, here is a practical example of how hedge funds make their money by credit default swap and by shorting shares.

Having provided you with a:

  1. Hedge Fund Industry Overview
  2. Market Research and Feasibility
  3. Hedge Fund Business Plan
  4. Hedge Fund Marketing Plan
  5. Hedge Fund Name ideas
  6. Hedge Fund Licenses and Permits
  7. Cost of Starting a Hedge Fund
  8. Hedge Fund Marketing ideas

What is a Hedge Fund?

A Hedge fund can be simply defined as is a regulated investment fund, (a much wider range of investment and trading activities) that is typically open to a limited range of investors who pay a performance fee to the fund’s investment manager who invest the funds and bring returns.

The investment could either be a long term investment or a short term investment. Hedge funds manager are known to invest in a broader range of assets, which includes long term and short term investment in equity, bonds, commodities, and derivatives et al.

How Hedge Funds Work?

Hedge Funds Investment is not open to all and sundry basically because it requires large capital to invest in it. The amount required to invest in hedge funds could range from 1Million US Dollars to even multiple Millions of Dollars. Each Hedge fund manager has their requirements; so ensure that you save up some large amount of cash that can meet the investment requirement of the average hedge funds you can find.

There are several hedge fund firms in the United States of America, but that does not in any way place a cap on the industry. If you know you have studied the industry and you have vast and unique investment strategies, then you can come into the industry and make profits.

Despite the high volatility of the market, investors still choose to invest in hedge funds because of the huge returns on their investment they stand to gain if they got it right. Hedge funds are known to provide access to a wide range of investment styles, strategies and hedge fund managers for one easy-to-administer investment.

Hedge fund provides more predictable returns (depending on the objectives of the fund of funds), than traditional investment funds and it provides effective diversification for investment portfolios.

How Hedge Funds Make Money?

If you run a hedge fund firm, the easiest ways for you to make money is to help your clients make more money. The income you generate is based on your performance – which is why most hedge fund managers employ different investment strategies to generate good returns for their clients.

In other words, the performance fee is indeed the defining characteristic of a hedge fund. Examples of notable and famous hedge fund managers include:

  • George Soros – Quantum Fund
  • Carl Icahn
  • Ray Dalio
  • Steve Cohen
  • Bill Ackman

There are 4 key strategies hedge funds deploy to make money fast. They are:

  • Asset Management Fee
  • Fund Performance Fee (based on the ROI on clients invested funds)
  • Credit Default Swap
  • Options Trading / Shorting of Shares

Hedge fund firms are known to generate income by charging both a management fee and a performance fee from their clients. On the average, hedge fund firms charges between 1 percent and 2 percent of assets under their management annually and the performance fees is about 20% of gross profits returned by the fund which is usually based on certain constraints.

If you are looking towards starting your own hedge fund, then you should be ready to manage a small highly professional workforce. This is so because on the average, hedge fund firms are known to manage huge assets with relatively few employees. Hence, the stiffer competition in the hedge fund industry amongst those seeking for job openings in the industry.

Hedge funds make use of various financial instruments in order to minimize risks to the barest minimum, boost returns and of course to reduce the correlation with equity and bond markets. When it comes to investment, flexibility is the watch word amongst numerous hedge fund firms around the globe.

Is Starting a Hedge Fund a Profitable Venture?

Saying that Hedge fund investment is a risky venture is just stating the obvious because hedge funds aren’t regulated by the government or any financial regulatory body because it is limited to friends, business partners and families and not open to the general public. The risk involved in hedge funds is what makes it open to only few accredited investors.

One thing that makes investors dare the risk involved in hedge funds investment is the amazing returns they are likely to get on their investment. With hedge fund, you can make a profit margin that can be in multiples of your initial capital within a short period of time.

The fact that hedge funds earn huge returns on investments makes it one of the most attractive investment tools for accredited investors. Although investing in hedge funds has its own fair share of risks, but you can be rest assured that with experienced Hedge fund managers, you can avoid majority of the risks you are likely going to encounter when you invest in hedge funds.

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