Mathematical explanations for the world mark modern finance, and wherever math is, you’re bound to see symbols and variables.
You don’t need to know all of the equations that shape financial theory, but you’ll have a leg up if you know the Greek letters used to describe different sources of risk and return. Keep this list handy when investigating hedge funds:
Alpha: Investment return that’s different than you’d expect, given an investment’s beta, which is its exposure to market risk and return. In the hedge-fund world, alpha is used to describe the value that the fund manager adds and the extra return generated for the amount of risk that the fund takes.
But remember, alpha can be negative, meaning that the fund manager subtracts value from the fund. Some researchers aren’t sure that alpha exists at all.
Beta: The amount of risk in the overall market portfolio. The market beta is 1, so an investment with a beta of more than 1 is riskier than the market as a whole. You’d expect the investment to return more than the market in an up year and less than the market in a down year.
If beta is less than 1, the investment is less risky than the market, and if beta is negative, the investment moves in the opposite direction.
Delta: The percentage change in an investment. Delta is often used to describe how much an option changes in price when its underlying security changes in price.
Gamma: The rate of change in delta. Gamma is exposure to any change in price, positive or negative.
Sigma: Represents standard deviation, or the likelihood that any one number in a series — like a series of investment returns — will be different from the return that you expect. The higher the standard deviation, the greater the investment risk.
FAQs
A hedge fund is a limited partnership of private investors whose money is pooled and managed by professional fund managers. These managers use a wide range of strategies, including leverage (borrowed money) and the trading of non-traditional assets, to earn above-average investment returns.
What is the minimum income for a hedge fund? ›
Hedge funds tend to have specific characteristics and features. They require wealth to participate. Hedge funds typically require an investor to have a liquid net worth of at least $1 million, or annual income of more than $200,000. They often borrow money to use in an investment.
What are hedge funds in simple terms? ›
Hedge funds are financial partnerships that employ various strategies in an effort to maximize returns for their investors. Unlike mutual funds managers, hedge fund managers have free reign to invest in non-traditional assets and employ risky strategies.
What is the minimum assets to start a hedge fund? ›
There's no real prescribed target, but you should aim to have at least $5 million in AUM to be successful, while $20 million will make you noticeable to investors. Having $100 million will get you noticed by institutional investors.
Can I start a hedge fund with my own money? ›
Yes, you could start with much less capital, or go through a hedge fund incubator, or use a “friends and family” approach, or target only high-net-worth individuals. But if you start with, say, $5 million, you will not have enough to pay yourself anything, hire others, or even cover administrative costs.
How do hedge fund owners get paid? ›
Key Takeaways
Hedge funds make money as part of a fee structure paid by fund investors based on assets under management (AUM). Funds typically receive a flat fee plus a percentage of positive returns that exceed some benchmark or hurdle rate.
Who Cannot invest in a hedge fund? ›
You generally must be an accredited investor, which means having a minimum level of income or assets, to invest in hedge funds. Typical investors include institutional investors, such as pension funds and insurance companies, and wealthy individuals.
What is the 2 20 rule for hedge funds? ›
The 2 and 20 is a hedge fund compensation structure consisting of a management fee and a performance fee. 2% represents a management fee which is applied to the total assets under management. A 20% performance fee is charged on the profits that the hedge fund generates, beyond a specified minimum threshold.
How much does a PM at a hedge fund make? ›
Pay at this level depends almost 100% on performance, which means that PMs could make a few hundred thousand USD… up to $1 million or even $10 million+. On average, though, a PM at a mid-sized fund that performs decently might earn between $500K and $3 million.
Is BlackRock a hedge fund? ›
BlackRock manages US$38bn across a broad range of hedge fund strategies. With over 20 years of proven experience, the depth and breadth of our platform has evolved into a comprehensive toolkit of 30+ strategies.
But lately, Wall Street has been wondering if hedge funds have reached Peak Pod. Returns dropped markedly at many multistrats in 2023. The average fund in the class returned 5.4%—even as the Nasdaq Composite and the S&P 500 cranked out total returns of 45% and 26%, respectively.
Why are hedge fund managers so rich? ›
Hedge fund managers typically earn above-average compensation, often from a two-and-twenty fee structure. Hedge fund managers typically specialize in a particular investment strategy that they then use to power their fund portfolio's mandate for profits.
Do hedge funds pay income? ›
Typically, the manager of the hedge fund is compensated with a fee based on 2% of the gross assets of the fund, and a profits interest entitling the manager (or, more typically, its affiliated general partner) to 20% of the fund's return (subject, in many cases, to minimum guaranteed returns for the limited partners).
What is the annual return of a hedge fund? ›
The average annual return on investment for hedge funds varies widely depending on the fund's strategy, market conditions, and the skill of the fund managers. Historically, it's been around 6-8%, but this can fluctuate significantly.
Can I start a hedge fund with no money? ›
One must bear in mind that even though you may start a hedge fund with no money, the operational costs of running a hedge fund can be astronomically high. These costs include not just trading and investment-related expenses but also legal, compliance, administrative, and marketing costs.
How does a hedge fund make money on a short? ›
To short a stock, a hedge fund will borrow shares of the stock in question (usually from their prime broker) and sell them to other investors who are willing to pay the market price. Then, as the stock price falls, the hedge fund will buy the same shares at a lower cost and pocket the difference.
