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4 Things You Didn’t Know About Hedge Funds

Money / Investing

4 Things You Didn’t Know About Hedge Funds

Hedge funds can help you achieve consistent returns regardless of which way the market is going – here are four helpful things to know about them.

Written by Xiou Ann Lim on 25 July 2017

You might already know that hedge funds have traditionally been used to reduce downside risk and achieve consistent returns regardless of market conditions through various methods. But here are four things you probably didn’t know about hedge funds.

01.

They aren’t regulated

That’s right. Unlike other forms of investing (stock markets, mutual funds, bonds, etc.), the Securities and Exchange Commission has little or no oversight over hedge funds as they are considered private partnerships between investors and hedge fund managers.

This means you will be giving your hedge fund manager complete autonomy to manage your money once you hand it over – which is why the importance of knowing your fund and manager well is often emphasised. It is also why only a certain class of investors (read: accredited) is allowed to invest in hedge funds. Often, this means investors have to be worth at least $1 million (excluding the value of their home).

There are advantages to being unregulated though – it means hedge funds are more agile and hedge fund managers can act quickly when they need to.

02.

They could be exempt from tax in Singapore

Not having to pay tax on money you earn from your investments may sound too good to be true, but Singapore has come up with a Resident Fund Scheme that allows just that – provided that the fund meets the criteria outlined by the Monetary Authority of Singapore (MAS):

  • the fund vehicle has to be based in Singapore
  • the fund vehicle must be a company
  • its administration must be conducted in Singapore
  • the fund must be approved by the MAS

Originally intended to boost the country’s fund management industry, this scheme greatly benefits investors too.

03.

Hedge fund managers get a percentage of profits earned from the fund

Unlike other fund managers, hedge fund managers receive a cut of the profits earned from the funds they manage. This can go up to 50%, but usually sits around the 20% mark. The good thing about this is that they are incentivised to perform. However, they are not penalised if they make a loss.

In some cases, the fund manager is also one of the key investors of the fund. So, you can be sure they have an interest in the performance of the fund. The rule of thumb is that hedge fund managers collect 2% of what an investor puts into a fund – as a management fee – and 20% of whatever profits that an investor makes from that fund.

04.

Some hedge funds may have a lock-up period

A hedge fund lock-up period determines when you can withdraw your funds. If you’re investing in one, be sure to check if there are any terms and conditions in place that help hedge funds managers ensure that capital remain in the fund. This can include an initial lock-up period that prevents you withdrawing from the fund.

The length of the lock-up period depends on the investment strategy employed by the hedge fund manager and is something that you can possibly negotiate with him or her.

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