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Types of Hedge Fund Investors
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Types of Hedge Fund Investors
Types of Hedge Fund Investors

Types of Hedge Fund Investors

Endowments as Hedge Fund Investors
Endowments behave much like foundations in the way they regard hedge
fund investments. Endowments usually make longer and firmer funding
commitments than foundations make so are somewhat risk-averse on their
investments. Endowments have had good luck using hedge funds to diver-
sify the returns on their portfolios, so their commitment to hedge funds re-
mains stronger than ever.
CORPORATIONS AND HEDGE FUND INVESTMENTS
Corporations (including U.S. companies and foreign businesses) invest in
hedge funds for a variety of reasons. For example, some corporations in-
vest in hedge funds with low-volatility, nondirectional strategies to im-
prove the return on cash balances that aren't required for the company's
cash management needs. Other corporations invest in hedge funds to in-
crease the company return on assets or to reduce the company's sensitivity
to volatile operating results.
Corporations pay corporate income tax on hedge fund returns. When
these returns are eventually distributed to shareholders as dividends,
shareholders pay ordinary income tax on the same returns. It would seem
to make more sense for such cash-rich companies to distribute cash to
shareholders, who could decide to invest the cash in hedge funds or other
financial assets or reinvest the dividends back in the company by buying
more shares. The situation is complicated because any distribution to
shareholders would likely be taxed as a dividend, so shareholders would
have less money after-tax to invest in hedge funds than if the company
made the investment in lieu of a dividend. In addition, not all sharehold-
ers could qualify to invest in hedge funds or come up with the minimum
investment amount.
PENSION FUND AS HEDGE FUND INVESTORS
Pension funds or retirement funds include a wide variety of structures
created by Congress to encourage U.S. taxpayers to save for retirement.
As mentioned earlier, ERISA (see Chapter 8) governs IRAs, 401(k) plans,
Keoghs, plus defined benefit plans and defined contribution plans. The
Types of Hedge Fund Investors
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