An Argument in Favor of Hedge Funds

An argument in favor of hedge funds is that often the most talented managers work for hedge funds. The fee structure of hedge funds permits talented traders to participate in the success of their strategies alongside their clients. The industry's standard fee structure is to charge a 1 percent management fee and a 20 percent performance or incentive fee. The management fee is levied against the net assets managed by the fund. The performance fee is charged against the profits earned by the fund. For example, if a hedge fund generates $100 million in trading profits in a given year, $80 million would go to the investors, and $20 million would be charged by the managers as a fee. A feature called the high-water mark means that fees are never charged twice on the same performance. If you lose money, you have to earn it back before new fees can be charged.

Given the size of these fees, hedge funds are an attractive employment option for any manager. Individuals are interested in earning these large fees-–which they cannot do working as mutual fund or traditional asset managers. This allows an established hedge fund to be highly selective when hiring managers, picking only those with real talent. Furthermore, because of the level of competition in the industry, only talented managers survive. If you are interested in having the most talented managers making trading decisions with your money, hedge funds are the way to go.

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