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Introduction
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Introduction

HEDGE FUND BASICS
Many investors are unfamiliar with the way a hedge fund investment be-
haves. In addition to having more investment latitude than traditional in-
vestment managers, a hedge fund manager may charge a variety of fees and
place restrictions on exit from a hedge fund.
Fees
Hedge funds charge a variety of fees. Other types of investment pools, in-
cluding mutual funds, private equity funds, and real estate investment
trusts, charge the same types of fees, but the structures of the fees may dif-
fer slightly in the hedge fund industry.
A management fee is charged as a flat percentage of assets under man-
agement. Hedge funds generally charge an annual management fee be-
tween 1 and 2 percent. For example, if a fund charges 1.5 percent, it might
assess a monthly fee equal to .125 percent (1.5%/12) based on the value of
the fund's capital at month-end. This fee is charged regardless of whether
the fund has been profitable. Some funds calculate the management fee
quarterly or less frequently.
An incentive fee is based on the profits made by the hedge fund.
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HEDGE FUND COURSE
FIGURE 1.5
Risk and Reward
Risk and Reward
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