Hedge Funds Key Terms

Learn about the process of investing in hedge funds

By Terri Deno

Hedge funds are a type of investment in which individuals and companies can hold a stake. Hedge funds can include foreign exchanges, debt, derivatives or publicly traded equity. The appeal to invest in hedge funds lies in the structure of the investment. Hedge funds are generally set up so that they are mostly exempt from any kind of financial regulations. The limits on the amount of investors in each fund and the particular strategy a hedge fund uses can provide large returns for investors.

Asset-based

An asset base of a hedge fund is the total capital amount that is put into the fund or portfolio. Asset-based lending in hedge funds is a strategy used to acquire capital through loans using collateral.
Try: HedgeCo provides a detailed explanation of using asset-based lending in hedge fund investments.

Fund strategy

A fund strategy is a strategy used to direct trading activities of a fund. There are many well-defined strategies used by investors.
Try: Magnum Funds provides definitions of the most common hedge fund strategies and a guide to when these strategies should be used.

Hurdle rate

The hurdle rate of a hedge fund is the point at which the manager of the fund will begin taking incentive fees on the returns. If a fund has a hurdle rate of 5% and the return for the year is 15%, the incentive fees will only be taken from the additional 10% above the hurdle rate.
Try: Seeking Alpha provides information on hurdle rates and how hedge funds produce large returns.

Performance incentive fee

A performance incentive fee is a fee that is assessed on any new profits a hedge fund earns during a specific assessment period. The performance incentive fees are paid after the hurdle rate is met, if the hedge fund has a hurdle rate.
Try: Money Science provides information and examples on the types of fees that can be earned by hedge fund managers.

Risk expectation

The risk expectation of a hedge fund is an assessment made by the fund manager to determine a general level of risk based on the investments and strategy used to manage the fund. This risk is expressed in four pre-set values: low, moderate, high, and very high.
Try: Investopedia provides information on the performance of hedge funds as well as the risks associated with investing in hedge funds.

Subscription

A hedge fund subscription is the act of buying shares of a particular hedge fund. This requires an investor to sign a subscription agreement and become a shareholder.
Try: The Securities and Exchange Commission provides tips on what to look for before investing in a hedge fund, because many hedge funds are not regulated by state or federal agencies.