Hedge Fund Principles

What is a Hedge Fund?   A Hedge Fund may be described as a pool of private capital used to leverage an investment portfolio. It is usually structured as a Limited Partnership.  The General Partner (Investment Fund Manager) generally should have the sophisticated portfolio management practices of a seasoned and disciplined trading professional; The Limited Partners (capital investors) are generally high net-worth individuals and institutions, and function as silent partners.

Unlike with Mutual Funds, the General Partner's compensation is largely incentive-based depending upon performance, productivity & fund returns.  Most General Partners (Managers) usually have their own money invested in the fund.

The average small (tiny, micro AUM < $25MM) Hedge Fund is generally exempt from and unencumbered by archaic regulatory (Securities Act of 1933, Investment Company Act of 1940, etc.) procedures, and hence may have restricted liquidity, as they cannot be sold (or bought) in the open market. There are some (larger) funds and managers that are registered, and registered investment advisors (RIA), and are regulated by the SEC.

Smaller funds rely on exemptions provided by REG D, Rule 501 and Rule 506. As always things (may) change, and some experts in recent years, expect the SEC changing the rules and regulating this trillion dollar industry. It started with the idea of a voluntary registration, specifically of funds with assets over $25MM. December 2019 marked the (first time) recommendation to enhance the definition of Accredited Investor.

For specific information about us please review the About MAST Information page.

How to Start and Manage a Hedge Fund.

 

CONTENTS:

ON THIS PAGE:

 

OTHER ITEMS:

 

Hedge Fund Structure

A (small) Hedge Fund is generally a Limited Partnership structure allowing the pooling of "private" assets, but is not registered with the Securities and Exchange Commission (SEC) under the 1933 Securities Act (1934 amended) or under the Investment Companies Act of 1940 (like Mutual funds). Hence, a very important part of the structure - a hedge fund generally cannot be sold (or bought) in the open market, thereby limiting liquidity.
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Limitation of Participation

This obviously limits participation to the wealthier populus (Accredited Investors); the theory (not always true) being that wealthy individuals can better understand and manage risk. Though the structure is a partnership, investors are limited partners (silent) where participation is limited to subscription and profits (or losses) and there is no liability for the actual company. The structure is managed unilaterally by the general partner, whose rules and methods, as itemized in the partnership agreement, are absolute.
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Strategies & Goals

Hedge Funds may employ various strategies to increase and sustain performance gains. These strategies include Short-selling, Arbitrage, Market Neutral, Special Situations, IPO, M&A, Liquidation & Bankruptcy, Hybrid, Multi-Strategy, Income, Global, Macro, Specialized, Growth, Options & other Derivatives, etc.  Their goals can also be as diverse including High Risk, Capital Appreciation, Capital Preservation, Income, etc.
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Reporting & Web Access

Most Hedge Funds report on an annual basis and use an independent accountant audit.  Some may send semi-annual unaudited statements, or even quarterly.  Secure (specific client LOGIN) web access to performance and other information has become more prevalent in recent times.
NOTE: the website CANNOT be used to "advertise" or even inform the public-at-large about offerings, performance, etc., unless the fund is registered (fiduciary).
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Minimum Investment

The minimum investment is generally around $250,000 to $1,000,000 with a few variations.
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Minimum Lock-In Period

A minimum lock-in period (no withdrawals expected) of about 2 years, to about 5 years, with most being around 36 months.
We can facilitate coupling your trading goals with your setup

 

Tax Considerations

The Hedge fund (the limited partnership) itself is not taxed, but the profits flow through to the partners.  Partners generally get a K-1 to file along with their annual 1040 filing with the IRS.
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Administrative Fee

The administrative fee typically ranges from 1% - 2% to as much as 5%.
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Performance Fee

Profit participation (performance fee) - where the general partner gets part of the profits - range from 20% - 25% with some as high as 40% to 50%.
We can help devise an optimal and appropriate profit/fee structure

 

Hurdle Rate for Fee

The above Performance Fee usually occurs with a threshold, where if the fund fails to perform past a Hurdle Rate then no profit is reallocated to the general partner. The Hurdle Rate, if used, is generally between 0% to about 5%.  Some funds also use a High Water Mark: which is the highest net asset value previously attained at the end of any prior fiscal period.  The Performance Fee becomes due after the fund value has exceeded this high-water mark.
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HF Benefits & Suitability

Hedge Funds are not suitable for every portfolio. However, with a good Manager, a hedge fund can often have lower risk than Mutual Funds while sustaining steady, market beating returns. Unfortunately, while the hedge fund index has performed rather well in the past decade, not all hedge funds are safe or secure or even well-performing funds.  Capital availability is also an issue, as not everyone can afford the high capital requirements to entry into the Hedge Fund world.

Hedge Funds can benefit a portfolio by reducing volatility and risk while simultaneously increasing returns, as many hedge funds have the ability to generate positive returns in both rising and falling equity and bond markets.  Most importantly, Hedge funds may provide an ideal long-term investment solution for your portfolio, eliminating the need to correctly time entry and exit from markets.
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MASTPartners:
Hedge Funds Comparison

Hedge Fund Comparison In a Nutshell: Contact us for more information.

Variables Avg.Fund eg.: w/MAST
Min $ $1MM++$250K
Lock-in 2-5Yrs24 months
Fee/year 2% - 5%0.5%/quarterly
Profit%/yr 20%-50%20%
Hurdle % 0% - 5%N/A
Hi-Water SomeN/A
Strategy Various


Quantitative
Derivatives
Alpha-based, Hybrid
Goals Various


Capital Preservation
Alpha Growth
Tax Managed
Managed Risk
Reporting AnnuallyMonthly
Online None!Daily Web Updates
Taxes K-1 usuallyK-1 to Partners
Structure LP/LLC…Pass Thru Del. LP

 

HFs Vs. MFs (Open End)

Comparison with Open-ended Mutual Funds:

Hedge Funds Mutual Funds
A "pool" of private investment capital; structured as a limited partnership to invest in a portfolio made up of a variety of securities. A portfolio made up of numerous stocks (or bonds) but regulated by percentages in accordance with charter.
Managed by a General Partner, who makes fees based only on investors' profits NOT losses. Managed by a Fund Manager, who gets paid regardless whether investors profit or lose.
The General Partners' own assets are more likely to be a significant percentage of the fund. The Fund Managers' own assets are almost never invested in the fund.
Available only to Accredited Investors, high-networth individuals and institutions by a Confidential Offering Memorandum and Partnership Agreement Available to the general public by prospectus.
Not allowed to advertise Can advertise, and charge 12B-1 fees/expenses.
Are limited (SEC) to 99 " partners" investing in a fund. Are not limited in the number of investors who can invest in the fund
Are not limited by the SEC in the securities or strategies used to be profitable Are limited in the securities or strategies used to be profitable
General Partners can liquidate a position BEFORE it drops in value and shift focus to another issue. Regulatory requirements do not necessarily allow the Funds to liquidate a dropping stock as per prospectus!
Entry is significant - $100K-250K to $1MM Entry is usually from $1,000 to $3,000.
Low expenses and fees are a percentage of the profits. Higher expenses, but no fees from profits - the Fund Manager makes money regardless of whether the investor makes money.
Illiquid, may not be able to redeem at any time. Traded daily on the open markets.
Usually a lock-in period to prevent aborting any strategies and creating losses Small fee to redeem within six months sometimes; traded daily.
About ~8,000 funds Over ~9,000 funds

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MAST Partners

MASTPartners has significantly lowered the entry point for new Hedge Fund Managers to get started. The usual overhead of starting a hedge fund has also been significantly reduced, thereby allowing the new manager to get started easier and sooner. Please see our HF Setup Information.