Many people are unaware of the term “Hedge Fund” because general public don’t deal with hedge fund. “Hedge Fund” indicate a private investment company that operates under the 1933 Securities Act and 1940 Investment Company Act. Investors prefer to define hedge fund as “alternative investment vehicle”. Hedge funds cater to the need of sophisticated private investors.

A hedge fund works just like a limited partnership program. In a hedge fund there is a general partner and a few limited partners. The general partner is held responsible for the fund’s day-to-day operation as well as all the investment activities. The limited partners on the other hand are not responsible for the way the fund operates but they are the investors who supply capital for the fund. They don’t take part in the trading. They have limited liability whereas the general partner is liable for all the activities of the partnership. The general partner pulls the capital invested by the limited partners. He then plans the investment strategy and acts accordingly.

There is no public offering in such funds. Hence “hedge funds” are often known as “Non-Public Offerings”. Therefore “hedge funds” can not opt for general advertising. “Hedge Funds” need to secure investors through consultants, investment advisors, brokers, registered representatives or through word of mouth promotion. In most cases “qualified purchasers” or “accredited investors” invest in “Hedge Funds”. According to the Federal Securities laws “accredited investors” or “qualified purchasers” are defined in terms a minimum income or asset threshold that they need to meet in order to qualify to invest in “Hedge Funds”. So it is important for the fund manager to check the background of an investor and gather some information about the investor. The fund manager will have to make sure that the investor meets the minimum asset threshold.

Usually a “Hedge Fund” is consisted of nearly 100 limited partners and the fund should comply with certain safe harbor provisions. However the investment manager can undertake greater risks as an unregulated entity. When the manager takes greater risks the investors are exposed to both substantial profit and loss.

The investment manager gets a performance fee from the “hedge fund”. The performance fee of the general partner can range from 20% to 40% depending on the investment strategy implemented by the hedge fund manager. Other than the performance fee “hedge funds” also include a management fee of 1% or 2% of all the income or assets under management.

There are two types of “hedge fund” in New York the small boutique styled hedge funds and the worldwide hedge funds operated by experts. New York Hedge Fund’s particular niche is dictated by the general partner’s experience, expertise and ability to identify the investment opportunities. The boutique styled “hedge funds” especially relies on the investor manager’s skill and knowledge. The investment manager can focus on a particular economic sector. A “hedge fund” can follow different styles such as “Market Neutral” Style, “Value style, “Emerging Markets” style, “Trading” style etc. The manager of the fund participates in profit as well as loss with the limited investors.