Hedge Funds - How They Work

As a financial advisor with Emerson Equity, Darrach Bourke draws on more than 17 years of experience in finance. He comes to his role as a former executive vice president of Stella Capital, where he oversaw management of a fund of hedge funds.

Known for their exclusivity and complex nature, hedge funds function as pooled investments from experienced and well-resourced investors. The individual investors, often knowna s limited partners, provide the capital that a fund manager then distributes among a carefully selected portfolio of products. 

The fund manager, known as the general partner, seeks to distribute assets in a way that minimizes risk and maximize returns. This aim parallels that of more traditional vehicles, such as the mutual fund, though the hedge fund general partner has more opportunities for doing so.

Since a hedge fund is more limited in size and investor characteristics than other funds, it does not fall subject to regulation by the Securities and Exchange Commission. This means that fund managers may invest in almost any market instrument, including stocks and derivatives as well as real estate and currencies.

Hedge funds are also flexible in the techniques that they use to promote high returns and minimal risk. As their name indicates, such funds originally depended on hedging techniques, in which managers would invest long to benefit from rising prices, while also going short on some investments in case prices fell. Since then, managers have diversified their strategies. Some choose to invest in a way that takes advantage of pricing inaccuracies, while others will borrow money to increase investor returns.

Regardless of the strategy, however, investors must pay for these expanded opportunities with higher fees. The traditional fee structure has been 2 and 20, which translates to 2 percent of invested capital and 20 percent of profits. Some experts believe that this may change as the market shifts.

CFA Institute Study Suggests Investment Leaders Must Change to Succeed

For more than 15 years, Darrach Bourke has been working in the financial industry in California. He serves as a financial advisor for Emerson Equity – a registered investment advisor and broker-dealer –and is familiar with a wide range of financial planning services, including retirement planning and education funding. Darrach Bourke also belongs to the CFA Institute, an organization dedicated to supporting the investment profession.

In April 2017, the CFA Institute released the results of the Future State of the Investment Profession study. This study coincides with the organization’s Putting Investors First campaign, an annual initiative that encourages that industry to address the needs of investors internationally, and serves as a guide for professionals who wish to adapt as time goes on. According to the data gathered in the study, investment industry leaders who do not alter their business model could put the future of their firms at risk.

The CFA Institute’s Future State of the Investment Profession study looked that which skills investment leaders must have to succeed in the future. Based on responses from Europe and North America, the ability to create and communicate a vision for a firm was the most important skill for asset manager CEOs. Meanwhile, relationship building skills, crisis management, and ethical decision-making were essential skills in Latin America, Asia Pacific, Africa, and the Middle East.

Based on the study, the CFA Institute also found that investment industry leaders must focus on such areas as professional transformation, stronger standards, and fiduciary implementation if they want to be successful in the future. Most respondents expect changes in investment trends over the next five to 10 years that will affect existing investment firms. Some of these changes include redefined client preferences and technological advances.