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hedge fund
A pooled investment vehicle that is privately organized and is administered by professional investment managers. It is different from another pooled investment fund, the mutual fund, in that access is available only to wealthy individuals and institutional managers. Moreover, hedge funds are able to sell securities short and buy securities on leverage, which is consistent with their typically short-term and high risk-oriented investment strategy, based primarily on the active use of derivatives and short positions. US hedge funds are exempt from Securities and Exchange Commission reporting requirements, as well as from regulatory restrictions concerning leverage or trading strategies.  Their objective is often to preserve investors' capital by taking positions whose returns are not closely correlated to those of the broader financial markets. Such vehicles may employ leverage, short sales, a variety of derivatives and other hedging techniques to reduce risk and increase returns. Hedge fund management typically receives a significant portion of compensation from incentive fees tied to fund performance—20% of annual gains over a certain hurdle rate, along with a management fee equal to 1% of assets is not uncommon.

hedged equities investment strategy
A strategy that seeks to reduce exposure to market volatility by hedging a portfolio of common stocks with short positions and index options.

high-water mark
High water mark indicates the highest previous NAV (net asset value) of a portfolio at specified periodic measurement dates, e.g., calendar quarter ends. The fund manager receives a performance fee only when the portfolio value exceeds its previous high. A high water mark policy prevents a manager from taking a bonus for good performance in a given period without first making good any earlier absolute losses. For example, if the value of an investor's contribution falls to, say, $500,000 from $1 million during the first year, and then rises to $1.5 million during the second year, the manager would only collect incentive fees from that investor on the $500,000 that represented actual profits in year-two.

hurdle rate 

The return above which a hedge fund manager begins taking incentive fees.  If, for example, the manager sets a hurdle rate equal to 5%, and the fund returns 15%, incentive fees would apply only to the 10% above the hurdle rate.

 

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