Where do Hedge Funds Get Their Capital
Where do Hedge Funds Get Their Investors
Hedge funds start with a person acting as the chairman of a limited partnership, which is the structure of most of them. This person looks after potential investors and persuades them to invest in the fund, but they make the actual investment decisions and decisions about the fund. These are usually established investment consultants with proven track records in their field.
Hedge funds can make billions of dollars a year, and make money from the fee structure that their investors pay based on assets under management (AUM). The more investment money a hedge fund can amass, the more money it can earn itself if it performs well.
While the fund accumulates investment dollars, it makes money based on its performance (asset under management (AUM). It can also raise money based on the fees that its investors pay to invest the funds in the structure based on the assets under management (AUM) and the performance of a fund.
Normally, a fund receives money for positive returns that exceed certain benchmark hurdles, such as a positive return on assets under management (AUM) of 10%.
Hedge Fund Capital Raising
Hedge funds raise their capital from a variety of sources, including private equity firms, blue chip treasury functions, hedge fund managers, institutional investors and sophisticated investors. Marketing to larger funds is an important way to attract new investors and dollars, which boosts returns.
Hedge funds typically look not for the average person buying shares in an investment fund, but for a limited partnership that builds up a large amount of capital. Fund managers invest in funds before they launch them to build investment portfolios. When a fund manager performs exceptionally well and delivers excellent returns, the funds attract large institutional investors who can invest a significant amount of capital.
Good performance should also attract additional capital from these investors, but not necessarily in the form of fund units themselves, but in other forms of capital.
Hedge Fund Fees
Hedge fund management companies typically charge their clients management and performance fees. Two and Twenty (2 / 20) is a popular fee system that is standard in the hedge fund industry, but is also common in venture capital and private equity.
This fee structure has come under fire from investors and politicians for the lucrative fee structures that have made many hedge fund managers extremely rich. It represents 2% of the asset under management (AUM) and is referred to as a “two for one” fee or a 2.5% management fee. However, 2% management fee does not actually represent such a large tranche of money when looking at the associated costs of running an aggressive and actively managed fund.
Hedge Fund Watermarks
Hedge funds are also struggling with high watermarks that apply to hedge fund performance fees. High watermarks require that fund managers receive a percentage of profits if the net value of a fund exceeds its previous peak.
Where do Hedge Funds Get Their Capital: Marketing
Hedge fund managers are hampered in their efforts to raise funds by rules that prevent them from publicly promoting a particular fund.
However, this can be done by setting up an informative website explaining the investment strategy and providing information on the performance of the fund and other investment options. Fund managers can also try to create publicity by offering specific trading ideas on investment websites.
Where do Hedge Funds Get Their Capital: Contacts
Hedge funds are often marketed by fund managers who network with friends and business acquaintances, or by third parties – intermediaries, that is, individuals or companies acting as intermediaries between the investor and the fund management company or other investors.
Fund managers sometimes offer investors investment opportunities, and these investors get a return on a sizeable investment in the funds.
Initial investors often run their own networks to attract other investors, and hedge fund managers can produce basic marketing material to help potential investors. This type of material, known as a pitch book, provides information about the fund, its investment opportunities and the potential benefits of investing in the funds.
Three Ways Where Hedge Funds Get Their Capital
Here are three ways fund managers get money in the door. These aren’t mutually exclusive and fund managers layer these strategies together.
- Family and friends
- Investment advisors
- High Net Worth Investors
Family and friends in the inner small circle
These people are close to the fund manager. They invest in the fund because of their relationship with the fund managers.
Investment advisors and other institutional investors
These are people who are very sophisticated and are going to expect processes and procedures to be in place yet have the financial ability to write a $20million capital placing.
High net worth investors
These are investors in the wider market who hear about a fund via different channels. They will typically request a prospectus and invest on their own initiative.
Zanthe Alexander Bentley is a finance veteran with over 25 years’ wealth management experience advising both family offices and institutions on their corporate finance requirements including capital raises (debt & equity), restructurings and M&A activities. He has significant experience in investment management and investment banking and spent nine years at UBS focused on convertible bond arbitrage and equity derivatives.
Prior to getting involved in Asset Management he expanded a small Spanish brokerage from a handful of staff in Barcelona to a diversified brokerage company with over 150 personnel spread across 9 countries, transacting deals from High Grade to High Yield Fixed Income and Loans; Structured Products through to exchanged traded equities.
After taking time to focus on family office activities in Asia, Zanthe-Alexander now leads an ambitious zero-leveraged fund providing exceptional growth and income to Sophisticated Investors.
Zanthe Alexander Bentley Twitter: https://twitter.com/BentleyZanthe