Hedge Funds: Simple Guide To Investing For Beginners (+Top 10 Hedge Funds list)

hedge funds
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In the business world, hedge funds are in the lips of every individual. The difference between the rich and the poor is the risks the rich people take. However, hedge funds involve higher risk when compared to mutual funds. Although it attracts higher returns. So, this article will serve as a guide in showing you the list of hedge funds, hedge fund definitions, how to invest in hedge funds, and also jobs available in hedge funds.

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Before we go further, let us look at the definition of hedge funds.

Hedge Funds Definitions

Generally, hedge funds has so many definitions, but let us look at a few of them.

According to the oxford dictionary, a hedge fund is defined as “an offshore investment fund. Basically, it is formed as a private limited partnership, that engages in speculation using a credit or borrowed capital.” 

Additionally, a hedge fund is defined as a private investment partnership and pool funds that use different and complex proprietary strategies. Also, it invests in complex products, including listed and unlisted derivatives.

Hedge Funds

A hedge fund is simply a pool of investment that is contributed by a limited number of partners called investors and is operated by a professional manager with specific goals in mind – mainly to maximize returns and eliminate risk.

Think of it this way, It’s like a marriage between two people. A professional fund manager, who is also called the general partner, and the investors sometimes called the limited partners. Together they pool their resources into the fund.

It is relevant to know that hedge funds are only open to accredited investors. Because they require fewer SEC regulations than other funds. it faces less regulation when compared to the likes of mutual funds.

Meanwhile, these funds are generally limited to rich investors as they attract higher fees paid to their managers and they nonetheless involve more risk than other types of investments.

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Hedge funds were originally made to hold both long-term and short-term stocks. Hence, the positions were, therefore “hedged” to reduce risk.

So, the investors made money regardless of whether the market increased or decreased. The name stuck, it expanded to include different pooled capital arrangements.

Hedge Funds Investing

Due to the increase in the levels of risk associated with hedge funds, the U.S. Securities and Exchange Commission (SEC) places regulations on who can invest in them. Hence, not every individual is allowed to invest in hedge funds, only an institutional investor, like a pension fund, or an accredited investor is allowed to.

Hedge funds are not like mutual funds, they are not for the average investor. Due to these regulations, there are ways on how to invest in hedge funds.

Read also Hedge Funds Vs Index Funds

How To Invest In Hedge Funds

To invest in hedge funds, you need to first research for funds currently accepting new investors. There are a lot of research tools online, but it is advisable to get the guidance of a financial advisor to locate potential hedge funds. 

After you must have looked into those funds’ fund managers and investment goals. You will also need to make contact with a hedge fund and ask for information on minimum investment requirements.

You also need to provide your assets, debts, income, and experience. This must be confirmed by a licensed third party, like a financial institution you have accounts with, an investment advisor, or an attorney.

Jobs In Hedge Funds 

Indeed, there are jobs available in hedge funds. Getting them is not as easy as people think. So, they specifically employ some of the best-paid business professionals anywhere in the world.

Building a career in a hedge fund takes guts, networking, determination, stamina, and a fierce competitive streak.

Also, when compared with investment banking or private equity, there’s less structure and hierarchy to hedge fund careers.

Many people want to get a job in a hedge fund because of the money. Even junior employees can earn $500K up to $1 million let alone, the Senior-level Portfolio Managers. 

Basically, jobs in a hedge fund can be divided into investment personnel and business personnel. The investment personnel includes jobs like portfolio managers and research analysts who manage the fund. The business personnel consists of client management, compliance, and fund operations.

 let’s discuss the career path of the investment personnel role to see where you best fit.

Portfolio Manager

Portfolio managers are general partners who have large equity interests in the fund. They are in charge of establishing the strategy for investment. Also, they are responsible for trade execution decisions.

So, it is part of their daily routine to read reports, talk to analysts and company management, monitor industry and economic trends to make adjustments to their portfolios.

Portfolio Managers are senior professionals with 15 to 20 years of investment experience. They are at the top of their career path. Portfolio Managers make a lot of money. When I say a lot, I mean A LOT of money. Billionaires are born out of the industry each year.

Research Analysts

 Research Analyst usually responds to specific inquiries from Portfolio Managers or Senior Analysts that challenge their ideas. They generally have 3 – 5 years of sell-side or investment banking experience. Technically, Research Analysts and Research Associates have similar responsibilities except for one. 

They’re more concerned with research and modeling, they have a broader coverage universe. However, research Associates are involved with trading and operations to some limits. While Analysts are dedicated to investment research, Research Associates are indeed the jack-of-all-trades. 

In fact, one of the greatest challenges for a new Research Analyst is the raising and falling of the learning curve.

Top Hedge Funds 

The following are the top hedge firms based on their total assets under management (AUM) -the total market value of the investment that a person or entity manages on behalf of a client.

1. Bridgewater Associates

Bridgewater Associates is based in Westport. They provide services to pension funds, foreign governments, central banks, among others.  It was founded in 1975 by its Co-chairman and co-chief investment officer Ray Dalio from his two-bedroom New York apartment.

Specifically, the company offers four main funds:

  1. Pure Alpha, which major concern is on effective investment strategy
  2. Pure Alpha Major Markets, which targets a subset of opportunities that the Pure Alpha fund invests in
  3. All-Weather, which uses an asset allocation approach
  4. Optimal Portfolio, which combines features of the All-Weather fund with active management

2. Renaissance Technologies

This is a New York-based quantitative hedge fund that uses mathematical and statistical tools to reveal technical signs that run its automated trading strategies.

Renaissance applies these strategies to the U.S. and international equities, debt instruments, among others.

It was founded in 1982 by Mathematician Jim Simons. Currently, Forbes lists Simons as the 68th wealthiest person in the world as of Jan. 13, 2021, worth $23.5 billion.  The current chief executive is Mathematician Peter Brown. 

3. Man Group

This British Man Group has acquired more than 230 years of trading expertise. It began in 1784 as an exclusive supplier of rum to the Royal Navy. it later got into the sugar, coffee, and cocoa trading business. As of December 31, 2019, Man Group had $117.7 billion in AUM.

4.Two Sigma Investments

The company chairman is Israel Englander. He once had a career as a floor broker and trader on the American Stock Exchange.

Two Sigma Investments is in New York. The chairman is John Overdeck and David Siegel. The company uses quantitative technics to build mathematical strategies that rely on historical price models and other data.

As of December 31, 2019, Two Sigma Investments had $66.14 billion assets under management.

5. Millennium Management

Millennium Management is based in New York and was established in 1989. The company gives discretionary advisory services to private funds. As of December 31, 2019, Millennium had $42 billion under management.

Also, read Hedge funds vs Mutual funds

Hedge Funds List

Below is the list of hedge funds based on their assets under management. Only assets in private funds following hedge fund strategies are listed. 

Rank Firm Headquarters AUM as of second quarter 2021              (millions of USD)
1Bridgewater AssociatesHedge funds Westport, CT        $98,918
2Renaissance TechnologiesHedge Funds East Setauket, NY          $70,000
3Man GroupHedge Funds London, UK          $62,300
4Millennium ManagementUnited States New York City, NY            $43,912
5Elliott ManagementHedge Funds New York City, NY                $42,000
6BlackRockUnited States New York City, NY                   $39,907 
7Two Sigma InvestmentsUnited States New York City, NY                  $38,842
8The Children’s Investment Fund ManagementUnited Kingdom London, UK                  $35,000
9Citadel LLCHedge Funds Chicago, IL                  $34,340
10D.E. Shaw & Co.United States New York City, NY                  $34,264

This information above, was called from Wikipedia as of 18th march 2021.

Conclusion

in conclusion, hedge funds is basically not for everyone, the definition is also an important side to look at.

What exactly is a hedge fund?

A hedge fund is simply a pool of investment that is contributed by a limited number of partners called investors and is operated by a professional manager with specific goals in mind – mainly to maximize returns and eliminate risk.

How did a hedge fund work?

To invest in hedge funds, you need to first research for funds currently accepting new investors. There are a lot of research tools online, but it is advisable to get the guidance of a financial advisor to locate potential hedge funds.

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