We'll email you at these times to remind you to study
You can set up to 7 reminders per week
We'll email you at these times to remind you to study
it pretty good i like it this course and i want learn how to use investment formular like portfolio variance, and expected rate return formular e.t.c. to measure the funds and determine future returns or loss ahead.
can i get course on index fund.
and also can i get course on binary option trading
It becomes more understanding when compared to closed-end mutual fund.
On the sahre basis of the investor can withdraw there % of share profit from the fund
let's see if we can understand the structure of a hedge fund (a little bit) and also how the management
and the performance fees work out.
so most hedge funds, the funds themselves, are set up as limited partnerships.
so this is the hedge fund that Pete set up.
we'll call it the Pete Capital Fund 1, maybe in the future, we're going to start Fund 2 and 3 and all the rest.
and he's able to raise $100 million
10% of that $100 million, or 10 million of it, is coming from him
- or to be more exact, coming from Pete Capital Management, LLC (limited liability company)
which he starts off as the general partner of this fund.
and this might be a little bit confusing, but this one company, this is another company over here.
this company is going to manage the assets of that company.
and in return, it will be able to get management fees and it will able to get a performance fee
that we will talk about in a couple of seconds.
and probably Pete owns this entire company,
but he might have a couple of employees, probably four or five.
now the way it works with a limited partnership is that they dont call it necessarily shares, but it's
essentially the same thing.
someone who, out of this $100 million, contributed $30 million
would get 30% in limited partner interest,
someone who contributed 10% would get $10 million in limited partner interest
so let's just say that he does really good over the next year, that he's able to,
on a gross basis - before we take out his management fee or anything else -
grow the fund by $20 million,
so roughly on a gross basis, 20%
so this is net of trading fees, all the stuff he has to pay the broker, and all of that type of thing.
to understand, kind of what goes to Pete Capital Management,
that Pete can use to pay himself and his handful of employees,
first he gets the management fee,
and the management fee will be on the average net asset value
and i'm going to do it a little "back of the envelope" right over here,
it's normally done on a monthly basis, but i dont want to go into all of that accounting
but if he did this fairly linearly, consistently,
the average net asset value over the year would be $110 million
and so he'll get about 2% of that,
we're assuming he gets the 2% management fee,
and 20% performance fee (carried interest as sometimes called)
so if the average net asset value = $110 million
you multiply that times 2%
and that means that
he's going to get $2.2 million in management fees
this is for his salary, his employee's salaries, to pay the rent, to get some fancy computers
whatever it might be
this is kind of viewed as the cost to just manage the fund.
so we need to subtract that from the total amount to the fund,
because that's going to management companies
so instead of $120 million over here, we're going to have
what is that, $117.8 million
and then we'll have to calculate how much he's going to get in performance fee
so in this situation, net of his management fee,
we have a $117.8 million gain.
the way that we set up the performance fee, or the carried interest, is that
Pete gets 20% of it,
or more particular, the general partner, the Pete Capital Management, LLC,
the partner that is controlling, managing, this fund will get 20%
so lets multiply that by 20%,
and what does that give us,
that gives us 3.56 million
will also go to Pete Capital Management.
so not bad, this year, he made
a little over $6 million
so that's going to him and his four or five employees,
so if someone performs well, it can be a very profitable business.
and just to make it clear how the mechanics works here,
these funds tend to be open-end funds, like open-end mutual funds,
well not like them, they have to be private,
they can only take money from credited investors, they cant market themselves,
they dont have to register with the SEC
when i say that they are open-ended, it means that
at any point, well not at any point, usually there are restrictions.
at certain points in time, the investors are allowed to redeem or kind of add investments to what's going
on in the fund.
so let's say at the end of the year, so instead of $117.8, we're going to have to subtract 3.56 from that
Pete's Capital Management.
so what's left of the fund is going to be, and he could leave it in there to reinvest but that would just
increase his share.
but let's say, Pete's Capital Management takes it out, so we would be left with .. let's see, we have
117.8 - 3.56, right?
gives us $114.24
and let's see this period, investors are allowed to redeem their interest.
and this guy right over here, this guy with the 30% interest, he says you know what, that was a pretty
good year. I want to take 10% of my interest out... so instead of having a 30% interest, he wants to
have a 10% interest.
so what happens is... so instead of a 30% interest, this is now a 20% interest. he'll take 10% out
so he'll 10% of a 114.24, so he's going to take out... that's essentially going to be,
you just have to move the decimal place, one place over.
so he's going to take out 11.424 million, that's this guy over here.
he's going to take out 11.424 million, and then the fund will
decrease by that amount.
so he can, at these specific periods, people can redeem, usually at the end of the month, at the end of
the quarter, or at the end of the year.
so the fund will be left with... let me take the calculator out again,
the fund will no be left with
114.24 - 11.424
which is going to be 102.816.
and at the same time, other poeple might say hey! that was a pretty good return, i'm going to now, contribute
to the fund.
so either way, it's not like a closed-end fund, where just at the beginning, people can commit their capital,
and they cant take it out until the end of the fund and they cant add more
during the life of most hedge funds, at specific periods
Log in to save your progress and obtain a certificate in Alison’s free Financial Funds online course
Sign up to save your progress and obtain a certificate in Alison’s free Financial Funds online course
Please enter you email address and we will mail you a link to reset your password.