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At it’s core, it’s a pooled-asset-vehicle, where institutions, sovereign wealth funds, family offices and accredited investors pool their money into account(s) that are managed by a hedge fund manager. The hedge fund manager charges fees based on their overall performance as the investors (LP or limited partners) profit from their strategies.
Most hedge fund managers
(General Partner) have significant capital of their own invested along their investors. As one of our LP’s said, “I want to know that you are making the same decisions with my money as you would your own”. We literally have significant capital of our own money (at risk) alongside our investors. Same strategies, same trades, same positions, same P/L. That’s what a pooled-asset vehicle is!
Hedge funds themselves are outside the reach of the average retail/individual investor because of SEC requirements Rule 501/506 Reg D*
Hedge funds do 3 things that are unique to them:
Use leverage (margin/borrowed money) to accelerate returns.
Trade derivatives (think stock options)
Can short stocks/indexes/etfs (profit in a stock decline or bear market)
To start your own hedge fund, it requires $15k–50k in legal paperwork, a viable trading strategy, trading capital (ideally $25m or more), LPs (investors/limited partners), 3rd party fund administrators, and a small team of accounting, compliance, investor relations, quants (if a quant hedge fund) and various other specialty skills.
LINK: SEC Accredited Investors