2. DEFINITION: HEDGE FUND
Financial Partnerships that
use “pooled” funds & employ
various strategies to earn
active returns for their
Investors.
3. HEDGE FUND OVERVIEW
• Often considered an aggressive investment strategy
• Not regulated by SEC- Reduced regulatory oversight
• Private investment structure – high risk high return
• Raise capital from accredited investors – Net worth $1mil
• Illiquid – long tenure
• Use Short Selling, Derivatives
• Leverage to increase returns
• Gives greater investment flexibility
• Performance fees or incentive allocations
• Tax benefits from fund’s structure
4. PERFORMANCE &
MANAGEMENT FEES
• Industry standard” 2 and 20 arrangement– fund
manager receives an annual fee of 2% of the
assets in the fund and an additional bonus of
20% of the year’s net profits
• Management fee typically covers the operating
expenses
• Manager only receives a bonus if the fund makes
money
2% = Asset Management Fee/ 2% of NAV
20% = Profit Cut
5. HEDGE FUND STRUCTURE
• Usually structured as Limited Partnership (but could also be an
LLC)
General partner—controls the fund
Limited partners– invest in the fund
• Fund Manager : Responsible for the overall management of
the fund’s assets and portfolio investments
• Prime Broker : Custody, Reporting, Settlement
• Administrator : Day to day administration, reporting, and
business of the fund, calculating NAV
• Legal Counsel : help navigate regulations, registration
obligations, exemptions and compliance responsibilities
• Auditors
6. KEY TERMS
• Hurdle Rate : Min Rate of Return/Profit required on a project
Gives an insight – follow a project or not
Riskier Project > Higher Rate
Use discounted Cash flow method to arrive at NPV
Expected Rate of Return > Hurdle Rate
• Watermark : Highest value that an account has reached
• Determine whether a fund manager can gain a performance
fee
7. Key Terms
• Fund Expenses - generally paid by the general partner or
investment manager from management fees and performance
compensation including ongoing legal costs, third-party
accounting and administrative services, regulatory filings,
brokerage costs, clearing costs.
• Side Letters – Special negotiation terms granted to some
investors in side letters, such as dealing with expenses, fees,
and preferential access to co-investments.
• Gates - amount an individual investor can withdraw, in any
given redemption period through provisions known as a gate
• Basis Point = Returns measured in 1 BP = 1/100
• LIBOR : London Interbank Offered Rate Interest rate of bank
Lending to other banks in London
8. FUND STRUCTURE
• Master Fund : Raise Capital from both U.S. taxable and U.S.
tax exempt investors in the United States and non-U.S.
investors
(i) a U.S. feeder fund established as a limited partnership in
the United States
(ii) a non-U.S. feeder fund established as a corporation in a tax
neutral jurisdiction
(iii) a master fund established in a tax neutral jurisdiction as a
limited partnership
12. Statement of assets and liabilities
Condensed schedule of investments
Statement of changes in partners’ capital
Statement of change in Net Assets
Statement of cash flows
13. Statement of assets and liabilities
Assets=Liabilities+Equity
DomesticFundL.P
Securities
Digital assets –Crypto Currency
Private investment companies
Derivative contracts
Securities purchased under agreements to resell
Cash and cash equivalents
Cash denominated in foreign currencies
Due from brokers
Due from crypto currency exchanges
Receivables for pending investment transactions
Collateral posted with counterparties for derivative contracts
Dividends and interest receivable
Other assets
Total assets 1,177,484,000
14. Securities sold short
Derivative contracts
Due to brokers
Payables for pending investment transactions
Securities sold under agreements to repurchase
Payable upon return of securities loaned
Due to related parties
Capital withdrawals payable
Advance capital contributions
Management fee payable
Dividends and interest payable
Accrued expenses and other liabilities
Total liabilities 744,239,000
15. DomesticFund,L.P.
Condensed schedule of investments
Common Stocks
United States
Banking
Manufacturing
Healthcare
Real estate
Total – United States xxxx
United Kingdom
Manufacturing
Telecommunications
Total – United Kingdom xxxx
Total – Common stocks xxxx
Public preferred stocks
Private preferred stocks
Total – Preferred stocks xxxx
16. Condensed schedule of investments
Exchange-traded funds
Corporate bonds
Government bonds
Municipal bonds
Asset-backed securities
Digital assets, at fair value
Crypto Currencies
Warrants purchased
Total return swaps
Total – Option contracts purchased
Securities purchased under agreements to resell, at fair value
Securities sold short, at fair value
Derivative contracts (liabilities), at fair value
17. DomesticFund,L.P.
Statement of operations
Interest
Dividends
Income from securities loaned
Income from staking rewards
Other income
Total investment income XXX
Management fee
Dividends on securities sold short
Interest on securities sold short
Interest expense
Administrative fee
Professional fees and other
Total expenses XXX
18. DomesticFund,L.P.
Statement of operations
Net realized gain from investments
Net realized gain from foreign currency transactions
Net unrealized gain from investments
Net unrealized loss from translation of assets and liabilities in foreign
currencies
Net gain from investments and foreign currency XXX
*defines the sum of net investment income or loss and net realized and unrealized gain or
loss on investments and foreign currency as net increase or decrease in net assets resulting
from operations. Funds may describe as net increase or decrease in net assets resulting from
operations or net income or loss.
