Hedge Fund Investing: A Practical Approach to Understanding Investor Motivation, Manager Profits, and Fund Performance

Fund Terms and Conditions

A fixed-income relative value fund generally offers very attractive subscription and redemption terms, given the liquidity and active market of the underlying securities in the fund. Fees charged by long and short funds generally include a 1 to 2 percent management fee and a 15 to 20 percent performance fee, although there is a wide range.

Credit-oriented funds may offer similar fees; however, the liquidity terms are generally less attractive, given that some of the underlying portfolio does not trade as frequently or may need to be held for a longer period than in other fixed-income strategies.

Investors who want their money back and who wish to redeem their investment can only do so according to the terms of the fund. Typically, funds restrict the redemption period so investors cannot freely redeem. A fixed-income fund may have monthly redemptions, whereas a credit fund is more likely to have quarterly, semiannual, or even annual redemption periods. Table 6.5 shows some typical terms that would be offered by a U.S.-based fixed-income or credit fund.

Table 6.5 Fund Details.

Main investment strategy	Fixed income
Geographical mandate	Global
Fund size (US$M)*	124
Firm AUM in hedge funds (US$M)	206
Firm's total assets (US$M)	206
Inception date	August 2004
Domicile	United States
Currency	USD
Hurdle rate	No
High-water mark	Yes
Listed on exchange	No
Minimum investment size	USD2 million
Subsequent investment size	USD100,000
Annualized ...