A hedge fund manager is a non-traditional asset manager who can be compared with a more traditional portfolio manager, such as a professional who runs a mutual fund. There are differences between hedge funds and mutual funds in the types of securities traded, strategies used and fees charged to investors. While traditional portfolio managers might take certain risks, hedge funds often maximize risk in order to outperform the rest of the markets.
In the U.S., investment companies must register with the U.S. Securities and Exchange Commission. Portfolio managers of traditional funds must disclose investment and strategy details in a prospectus. Hedge funds were not required to register with the SEC until new financial legislation was passed in 2011. Even then, only hedge funds with $150 million in assets or more were required to register, according to a January 2011 article in "The New York Times," and remain subject to lighter regulation versus traditional portfolio managers.
Traditional portfolio managers often adhere to a long-only strategy, which is to invest according to a strategy that stocks will rise in value. Hedge funds, however, are known to invest in a long/short strategy, which involves not only a bet on a stock's likelihood to rise but also a belief that another stock's price is over valued and will decline. This strategy dates back to the origination of hedge fund trading, when industry founder Alfred Winslow Jones applied long/short trading techniques in the mid-20th century.
Hedge fund managers often use leverage in trades, which involves borrowing financial securities from prime brokerages to place higher bets in the markets. It's a risky technique because if the trade fails, a hedge fund is still on the hook for the borrowed shares. In 2008, mutual fund managers began adopting a 130/30 strategy, which similarly adds leverage to trades, according to a January 2009 article in "The Wall Street Journal." Hedge funds face fewer restrictions than traditional portfolio managers must adhere to leverage allowances.
A hedge fund fee structure is typically two-pronged, including a 2 percent charge for fund management and a 20 percent fee for investment performance. Traditional portfolio managers, such as mutual fund managers, adhere to a somewhat opaque fee structure, although charges are typically outlined in a regulatory document, such as a prospectus, according to the U.S. SEC. According to a 2009 ABC News article, fees are assessed based in part on the size of assets managed and fund managers can lift fees discreetly.
- U.S. Securities and Exchange Commission: Mutual Fund Fees and Expenses
- ABC News; Investment Advice: Beware of Mutual Fund Fees; David McPherson; April 2009
- "The Wall Street Journal"; Leverage Shakes Up Mutual Funds; Shefali Anand; January 2009
- "The New York Times"; For Small Hedge Funds, Success Brings New Headaches; Azam Ahmed; January 2011
- SEC. "Implications of the Growth of Hedge Funds," Page 32. Accessed Nov. 6, 2019.
- Harvard Law School Forum on Corporate Governance. "The Activism of Carl Icahn and Bill Ackman." Accessed Jan. 9, 2020.
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- Congress. "H.R.3606 - Jumpstart Our Business Startups." Accessed Nov. 6, 2019.
- SEC. "Hedge Funds – A New Era of Transparency and Openness." Accessed Nov. 6, 2019.
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Geri Terzo is a business writer with more than 15 years of experience on Wall Street. Throughout her career, she has contributed to the two major cable business networks in segment production and chief-booking capacities and has reported for several major trade publications including "IDD Magazine," "Infrastructure Investor" and MandateWire of the "Financial Times." She works as a journalist who has contributed to The Motley Fool and InvestorPlace. Terzo is a graduate of Campbell University, where she earned a Bachelor of Arts in mass communication.