In definition, a hedge fund is a pooled fund that utilizes several strategies to manage and invest funds. It is primarily a managed fund that can invest in bonds, commodities, stocks, or even in real estate. How it differs from a mutual fund is that, with a hedge fund, anyone who wishes to invest should be accredited.
That is, their minimum annual income should fall under a specific net worth, depending on the country they are in. In the United States, for instance, you need to have at least $1 million to be a part of a hedge fund. Most important, these investors should have the crucial knowledge for investing. Unlike mutual fund investors, hedge fund investors are also known as the “sophisticated investors”.
When talking about the structure of hedge funds, one can see some similarities to mutual funds. For instance, like the latter which depends on sub-advisors to manage the funds, the former can be run by managers. However, unlike mutual funds, hedge funds cover a wider range of investment strategies and a broader list of the kinds of investment positions that they can follow.
The most commonly known hedge fund structure is called the “limited or general partnership” model. Here, the general partner takes on the responsibility to operate the funds. On the other hand, limited partners can only invest into the partnership but can only be liable for their own paid-in amounts.
Typically, the general partner uses a typical structure, the limited liability company, also known as LLC. In this case, the general partner has the responsibility to both manage and market the funds. Additionally, they can perform the important functions such as hiring fund managers as well as administering the fund’s operations.