How does the world's largest hedge fund really make its money?
According to a person briefed on the investigation, what they concluded, in part, was that the world's biggest hedge fund used a complicated sequence of financial machinations — including relatively hard-to-track trading instruments — to make otherwise straightforward-seeming investments.
Hedge funds make money by charging a management fee and a percentage of profits. The typical fee structure is 2 and 20, meaning a 2% fee on assets under management and 20% of profits, sometimes above a high water mark. For example, let's say a hedge fund manages $1 billion in assets. It will earn $20 million in fees.
Bridgewater Associates
Westport, Conn. Westport, Conn. In 1975, Bridgewater Associates was founded by Ray Dalio in his Manhattan apartment. Today Bridgewater is the largest hedge fund in the world and Dalio has a personal fortune of approximately $19 billion.
Citadel, a Miami-based multistrategy hedge-fund firm, led the list with a $74 billion net gain for its investors since inception in 1990 through 2023. It racked up an $8.1 billion profit last year.
They take outsized risks in order to achieve outsized gains. Many use leverage to multiply their potential gains. They also are unconstrained in their investment picks, with the freedom to take big positions in alternative investments.
Top leaders in the category for Hedge Fund software are DocSend, Backstop, StyleADVISOR.
Because they are not as regulated as mutual funds or traditional financial advisors, hedge funds are only accessible to sophisticated investors. These so-called accredited investors are high net worth individuals or organizations and are presumed to understand the unique risks associated with hedge funds.
Ken Griffin of Citadel is both the richest hedge fund manager and the highest paid. In 2022, he earned $41. billion, and by the beginning of 2023 his net worth was estimated at $35 billion.
Public pension funds account for the largest proportion of capital invested in hedge funds (25%) by the $1bn Club of institutional investors (Fig. 1), a figure which remains unchanged from the Preqin study conducted last year.
In total, Forbes counts 47 hedge fund billionaires who have a combined net worth of $312 billion, up slightly from the same number in 2022 who were worth $310 billion.
How much do hedge funds take from profits?
The 20% performance fee is the biggest source of income for hedge funds. The performance fee is only charged when the fund's profits exceed a prior agreed-upon level. A common threshold level used is 8%. That means that the hedge fund only charges the 20% performance fee if profits for the year surpass the 8% level.
Hedge Funds: Priciest Multistrategy Firms Keep Nearly 60% of Gains - Bloomberg.
Protecting Investors
Hedge funds offer their securities as private placements, on an individual basis, rather than through public advertising, and need not register as securities issuers or publicly disclose their financial performance and asset positions.
Hedge funds have always had a significant failure rate. Some strategies, such as managed futures and short-only funds, typically have higher probabilities of failure given the risky nature of their business operations.
They pay managers handsomely.
So if the fund manages $1 billion and it generates a 25% return ($250 million), the manager is paid 2% of $1 billion ($20 million), plus 20% of the returns exceeding a 5% hurdle, or $40 million. This is how successful managers of big hedge funds become billionaires.
A hedge fund raises its capital from a variety of sources, including high net worth individuals, corporations, foundations, endowments, and pension funds.
Throughout his investing career, Buffett has capitalized on the advanced options-trading technique of selling naked put options as a hedging strategy.
Hedge funds like Man Group have long been exponents of Python, but until a few years ago many were still using R or Matlab. The popularity of Python packages like Pandas and Numpy which improve Python functionality have encouraged the shift. So, too, have things like Cython, which can make Python up to 30X faster.
Hedge funds
Billionaires have access to another investment avenue, called hedge funds, that the average person doesn't. You can invest in a variety of things through a hedge fund, including individual stocks, land, commodity futures, bonds, and currencies.
There are two basic reasons for investing in a hedge fund: to seek higher net returns (net of management and performance fees) and/or to seek diversification.
Who Cannot invest in a hedge fund?
To invest in hedge funds as an individual, you must be an institutional investor, like a pension fund, or an accredited investor. Accredited investors have a net worth of at least $1 million, not including the value of their primary residence, or annual individual incomes over $200,000 ($300,000 if you're married).
John Arnold is almost 49 years old now and has a net worth of $3.3 billion. He established his hedge fund, Centaurus Advisors, in 2002 and by 2007, he became the youngest billionaire in the United States.
BlackRock manages US$38bn across a broad range of hedge fund strategies. With over 20 years of proven experience, the depth and breadth of our platform has evolved into a comprehensive toolkit of 30+ strategies.
Hedge fund management firms are often owned by their portfolio managers, who are therefore entitled to any profits that the business makes. As management fees are intended to cover the firm's operating costs, performance fees (and any excess management fees) are generally distributed to the firm's owners as profits.
BlackRock is publicly owned, with its shares held by various shareholders, including institutional investors like Vanguard Group and State Street Corporation and individual shareholders. The specifics of these shareholders can change over time.
