Who are Limited Partners? | General Partners | Accredited Investors | Management Fees and Incentive Fees in a Hedge Fund
Hedge Fund
is an alternative investment fund which invests across asset classes including
traditional as well as non-traditional with an aim to make supernormal returns.
Traditional
Assets includes Stocks and Bonds whereas non-traditional assets include Real
Estate, Commodities, Art objects, etc.
To know more
on Alternative Investment, visit https://www.econofinpedia.com/2024/01/what-are-alternative-investments-why.html
Hedge Funds
may use complex trading strategies including use of derivatives and take
leveraged positions.
Let's dwell
into it in detail.
Structure of
Hedge Fund
The Hedge
funds are set up as Limited Liability Partnerships (LLPs).
The Partners
in Hedge Fund can be categorized under two heads:
1) Limited
Partners
2) General
Partner
Limited
Partners
Limited
Partners (LPs) are the investors who invest in the Hedge Fund.
They belong
to the category of Accredited Investors who over and above possessing required
knowledge of investments, fulfill certain criteria including annual income and
net worth.
General
Partner
The General
Partner is the one who manages and deploy the funds. All decisions regarding
investment of funds are taken by the General Partner.
Who gets
what?
The General
Partner charges Management fees for managing the fund.
Over and
above the Management fees, the General Partner also charges an incentive fee as
percentage of gain.
The most
common structure of fees charged by a General Partner in a Hedge Fund is the
2/20 structure.
2/20 means
2% Management Fees + 20% Incentive fee as a percentage of Gains.
After
deducting all the charges and fees, the net return goes to the Limited
Partners.
There is so
much more to discuss. Will come up with Hedge Fund Series - Part 02.
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