Hedge fund backers are all companies that provide the seed capital necessary to get a new hedge fund up and to run. Hedge fund backers are private equity or venture capital funds that invest in startup hedge funds.
How do Hedge Funds raise capital?
If you are keen on finding the right answer as to how and where do hedge funds get their money from, then it is quite obvious that you will find this article interesting and informative. However, before doing so, we need to have a reasonably good understanding of what hedge funds are all about. Put in simple words; hedge funds are offshore investments. The hedge fund companies are typically private limited partnerships. They engage in speculative trading in funds that are borrowed.
In most cases, a single person is the one who manages the entire limited partnership firm that is into hedge fund investment. He makes the investment choices and also decides as far as the entire fund management is concerned. He also looks into the ways and means when it comes to raising money for investment funds. The main persons with others who run the show have rich experience and a proven track record. The person who runs the entire show takes help or professional fund managers, and they go about seeking funds from potential investors to invest in these hedge funds.
What Makes Hedge Funds Attractive
According to figures and reports, good hedge funds can bring in billions of dollars each year. This is because of their professional and efficient portfolio management and the well-thought-out strategies they have. Hedge funds make their money mostly through a well-planned fee structure. Fund investors pay these fees. The fees may depend on the Assets under Management or AUM. Apart from the regular fees, the hedge fund managers also collect some other charges. This is a percentage of the investors’ returns over and above the hurdle rate or benchmark rate. The more investors they have under the hedge fund, the more money they make through fees and other income sources.
How Is Money Raised?
There are several sources from where hedge fund managers raise their monies. The biggest chunk comes from individuals with high net worth. There are also other contributors like foundations, endowments, corporations, and pension funds. Generally, hedge fund managers do not seek funds from small individual investors. This is because it requires a big capital investment, and only then is it possible to form a limited partnership.
So, Hedge Fund Backers are an excellent opportunity for hedge funds.
However, raising funds for hedge funds is not easy. It depends on various parameters, including the performance of the fund managers during the initial phases. On many occasions, the fund managers invest their own money into the fund. This is done with the main objective of attracting the attention of big sized institutional investors. These big fishes have huge money to play around with, and therefore they can invest significant amounts of capital into the hedge funds.
Usually, Hedge Fund Backers are limited partners, investors.
The initial few years are important because of several reasons. If the fund manager can perform well and show impressive returns, the fund starts getting noticed. It catches the attention of big institutional investors. These fund managers’ job is to ensure the fund’s good performance, which is not easy in a highly volatile and highly unpredictable market. It all depends on the fund managers’ skill sets, and they have to work overtime and have to work smartly to show impressive returns. They will then convince the initial investors that they have the experience, expertise, and wherewithal to manage the hedge funds profitably. Once they can establish their credentials and reputation, it will not be long before the floodgates of new funds from big-time investors start coming into the hedge funds. The whole process takes some time, and in many cases, it may take a year or two before the hedge fund to start performing the way it should.
The Fee Structure Also Matters
The fee that is charged by the investors is highly critical. It is the main source of income for hedge fund managers. The fund managers must be able to reasonably good a tight walk between generating adequate fee-based earnings. As mentioned earlier, the fee structure is basically divided into two types. One is a flat fee that is charged irrespective of the funds invested. The other is related to the profit that the investors can earn through the respective hedge funds. It is based on a percentage of earnings. The hedge fund managers have to think through the fee structure to win-win situations for both the stakeholders.
To sum up, there is no doubt that hedge funds can help investors to make big money provided they choose the right fund managers. The managers should also know-how, where and when to raise money for investing in various instruments. In the last several years, hedge fund businesses started to be very complicated in a very competitive environment.
Hedge Fund Backers very often do not appreciate high returns on small portfolios because 20% on 1 million accounts are not the same as 20% on a billion dollars account. There a huge difference between managing a big portfolio and your own small portfolio.