Long/short equity buys undervalued stocks and shorts overvalued ones for relative gains Market neutral strategies balance long and short positions to eliminate market risk Event-driven funds profit from mergers, restructurings, bankruptcies, and spinoffs Global macro funds take positions based on interest rates, currencies, and trade flows

Fee Structures: The 2-and-20 Model

Traditional structure charges 2% of assets annually plus 20% of profits above a benchmark A high-water mark ensures performance fees are only charged on new profits above prior peaks A fund returning 10% gross may deliver only 6 to 7% net to investors after fees Fee pressure has reduced averages to roughly 1.5% management and 17% performance

Most funds require accredited investor status: $200K income or $1M net worth excluding home Many top-tier funds require qualified purchaser status: $5M or more in investable assets These requirements exist because hedge funds are exempt from many SEC protections Minimum investments typically range from $250K to $5M depending on the fund

Liquidity Constraints

Capital is typically locked up for one to three years after initial investment After lock-up, redemptions may be allowed quarterly or annually with 30 to 90 days notice Gates and suspension clauses allow managers to limit withdrawals during stress periods Investors should only commit capital they will not need in the near term

Performance Dispersion and Due Diligence

The gap between top-quartile and bottom-quartile hedge funds is far wider than mutual funds The median hedge fund has underperformed a 60/40 portfolio in many periods Due diligence should cover track record, strategy capacity, key person risk, and operations Verify audited returns, prime broker relationships, and regulatory filings before committing

Portfolio Role and Alternatives

Allocations of 5 to 15% are common among institutional and high-net-worth portfolios Liquid alternative mutual funds and ETFs offer similar strategies with daily liquidity Factor-based ETFs can replicate many long/short return profiles at much lower cost Focus on strategies that provide genuine diversification rather than leveraged equity beta

Hedge Fund Strategies: An Investor's Guide

Curated by: Rubric Advisors

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What Are Hedge Funds?

Pooled vehicles that use flexible strategies to pursue returns in any market environment
Unlike mutual funds, hedge funds can short sell, use leverage, and trade derivatives freely
Structured as limited partnerships with investors as LPs and the manager as GP
They aim for absolute returns rather than beating a specific benchmark

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What Are Hedge Funds?

Common Strategies

Fee Structures: The 2-and-20 Model

Who Can Invest

Liquidity Constraints

Performance Dispersion and Due Diligence

Portfolio Role and Alternatives

Related Topics

Introduction to Alternative Investments

Investing in Venture Capital

Accredited Investor Overview

What Are Hedge Funds?

Common Strategies

Fee Structures: The 2-and-20 Model

Who Can Invest

Liquidity Constraints

Performance Dispersion and Due Diligence

Portfolio Role and Alternatives

Related Topics

Introduction to Alternative Investments

Investing in Venture Capital

Accredited Investor Overview