A U.S. “hedge fund” usually is a U.S. private investment partnership invested primarily in publicly traded securities or financial derivatives. Because they are private investment partnerships, the SEC limits U.S. hedge funds to 99 investors, at least 65 of whom must be “accredited.” (“Accredited” investors often are defined as investors having a net worth of at least $1 million.) The General Partner of the fund usually receives 20% of the profits, in addition to a fixed management fee, usually 1% of the assets under management. The majority of hedge funds employ some form of hedging — whether shorting stocks, utilizing “puts,” or other devices.
Offshore hedge funds usually are mutual fund companies that are domiciled in tax havens, such as Bermuda, and that can utilize hedging techniques to reduce risk. They have no legal limits on numbers of non-U.S. investors. Some meet requirements of the U.S. Securities and Exchange Commission that enable them to accept U.S. investors. For the purposes of U.S. investors, these funds are subject to the same legal guidelines as U.S.-based investment partnerships; i.e., 99 U.S. investors, etc.
Hedge funds are as varied as the animals in the African jungle. Over the years, many investors have assumed that hedge funds were all like the famous Soros or Robertson funds – with high returns, but also with a lot of volatility. In fact, only about 3% of all hedge funds are “macro” funds of that type. Among the other 97%, there are many which strive for very steady, better-than-market returns. VAN tracks 14 different styles of hedge funds, in addition to a number of sub-styles, as well as hedge funds specializing in four different market sectors: technology, healthcare, financial services and media/communications.