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Hedge funds intro

Overview of how hedge funds are different than mutual funds. Created by Sal Khan.

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  • leaf green style avatar for user Tarek Seif El Nasr
    Why are Hedge Funds not regulated?
    (22 votes)
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    • leaf green style avatar for user sl122480
      Basically if you want to invest in something regulated then you invest in mutual funds. However, mutual funds are more limited in what they can invest in due to these regulations. The regulations for mutual funds are made to protect the average person, since anybody can buy mutual funds. Hedge Funds are not regulated because only an "accredited investor" can invest in them. The assumption is, if you are an accredited investor then you know what you are doing and don't need government regulation to help protect you. Therefore, hedge funds can invest in almost anything they want since they aren't limited by regulations like mutual funds.

      Very generally, in order to be an accredited investors, you have to be rich or be a professional investor (like somebody who invests for pension funds).
      (43 votes)
  • male robot donald style avatar for user harry park
    What does it mean when Sal says "can't take money from the public"
    Does that just mean the company can't be publicly traded on an open market?
    (3 votes)
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  • aqualine seed style avatar for user Haris Inam
    When you say a person can prove that they have enough sophistication (aka knowledge) to invest in a Hedge Fund. How does one prove that?
    (4 votes)
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    • orange juice squid orange style avatar for user Tamupiwa Dimairo
      "In the United States, for an individual to be considered an accredited/sophisticated investor, they must have a net worth of at least one million US dollars, not including the value of their primary residence or have income at least $200,000 each year for the last two years (or $300,000 together with their spouse if married) and have the expectation to make the same amount this year."

      The basic assumption by the government is that someone who has accumulated that much wealth , has got above average ability and experience to be able to to allocate capital prudently.

      source: https://en.wikipedia.org/wiki/Accredited_investor
      (6 votes)
  • male robot donald style avatar for user harry park
    What does it mean when Sal says "Beat the market"?
    (2 votes)
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  • piceratops seed style avatar for user Leondios Alexander Caldis
    why invest in a hedge fund? vs mutual fund?
    (2 votes)
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  • purple pi purple style avatar for user joshua roizen
    Are ivestment banks insured by the Fed?
    (1 vote)
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  • leaf green style avatar for user Jon lim
    Is the general partner also the hedge fund manager? Or the hedge fund manager works under the general partner?
    (1 vote)
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  • leaf green style avatar for user Michael Ktona
    How much capital is need to start a Hedge Fund, annual costs?
    (1 vote)
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    • male robot hal style avatar for user TJ
      Don't be mistaken by people who say you only need a small amount to start a hedge fund. Some can spend $1 million, others can start with $15,000. Also, expect to look at legal/ attorney costs of $20,000-$80,000. Long story short, it depends on who you recruit, and how much it will cost you to employ those people. There are alternative methods such as hedge fund platforms, which essentially allow you to not fully form a hedge fund, but begin trading and build a track record while looking for investors on the side to form the hedge fund with.
      Hope this helps.
      (1 vote)
  • female robot ada style avatar for user M Brown
    At - How does one prove that they have the "level of sophistication" to invest in a Hedge Fund?
    (1 vote)
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  • blobby green style avatar for user Bank Investor
    what are the key difference in investment that hedge funds can invest into that mutual funds can not? thanks
    (1 vote)
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Video transcript

In this video I want to see if we can understand the idea of a hedge fund a little bit better. And these tend to be pretty mysterious, and sometimes get a bad name because some hedge funds do do some fairly strange things and secretive things in the market. So people are, rightfully so, suspicious of many of them. But the real difference between a hedge fund and the types of mutual funds that we just talked about are that they're not regulated by the SEC. And because they are not regulated they can't market themselves. That's why when you watch financial shows, or you get a magazine, a finance magazine you will not see ads for hedge funds. The mutual funds are all over the place, marketing them left and right. Hedge funds the largest hedge funds in the world are definitely not even household names. Very few people even know what those largest hedge funds in the world are. And that's because they can't market themselves. No matter how good of a track record, or really how reasonable of a fund they might be-- some might not be reasonable, some are-- they can't market themselves. And they also can't take money from the public. So in general, in order to invest in a hedge fund, you have to be an accredited investor, which means you have a certain net worth, or maybe you have a certain income, or maybe by virtue of your education you can prove that you have a certain level of sophistication to invest in these things that aren't regulated. You, I guess, don't need the SEC to watch your back. So the regulation is a key difference. Marketing, no money from the public. And then the other key difference is how the managers tend to be incented. I know incented is not a word, or motivated. In the mutual fund world, managers get a percent of assets. So for mutual fund manager, larger is better. The more under management the more money the mutual fund manager's going to make. So they really just want to keep marketing it, marketing it, marketing it. They don't get a cut of the profits. So you really there's not a lot of incentive to kind of really beat the market here. Because if they kind of don't be the market one year, then all of a sudden, their fund will shrink. So they really just get a fee on the size of the fund. In a hedge fund, and usually the implication is that a hedge fund will be more actively managed, they'll get a larger management fees. So larger management fee, instead of the 1%, 1% is actually a lot for mutual fund. Instead of that, hedge funds tend to be 1% to 2%. So 1% to 2% management fee, and sometimes even larger than that. But the even I guess bigger difference, and this is where hedge funds are very different from a traditional mutual fund, is that the management company, the general partner, gets a percentage of the profits. So with a hedge fund manager or the management company, the going rate tends to be about 20$ of the profits of the fund. Sometimes it's less, sometimes it's a lot more. Some very successful hedge funds get 25%, 30% or even a larger percentage of the profits. So with that out of the way in the next video, I'm going to do some different mechanics of essentially the same returns, but one by hedge fund and then one by a traditional mutual fund.