One thing I probably
should make clear is that this idea of
getting a 2% management fee and then participating in
the profits at around 20%, getting this 20%
carried interest, this isn't unique
to hedge funds. This is actually the same
compensation structure that you'll normally
have at a venture capital fund or a private equity fund. And just to be clear,
venture capital really is a form
of private equity. But normally when someone
says private equity, they're not talking about
venture capital in particular. In all of these situations, the
managers will get roughly 2% for managing the fund and
they'll get 20% of the profits. The only difference really, in
terms of how it's structured, in a venture capital
or private equity fund will still have kind of
a limited partnership for the actual fund. And then they would have
a management company that gets the management
fees and the profits. The only difference is because
a hedge fund, for the most part, is probably going to invest
in public securities, it could get the money
right from the get-go and put that money to
work because it tends to invest in fairly
liquid assets. So this is fairly liquid
assets that they can just go out and buy. So a hedge fund will normally
just take as much money as it needs to invest
right from the beginning. A venture capital firm
or a private equity firm, what they'll do is
they'll say, look, I'm going to raise
$100 million fund, but I'm not going to be able to
just go out the door tomorrow and invest $100 million. In the case of a
venture capital firm, they're going to have to
look at business plans and entrepreneurs and
do their due diligence. Same thing for a
private equity firm. They're going to have to
look for companies that they might want to buy
private equity. You're normally talking
about more mature companies that maybe this firm thinks that
they can buy and turn around. Maybe more mature
companies that need some money to grow really fast. Venture capital
tends to be investing in some guys and a
business plan or maybe these smaller kind
of more, I guess we should call it,
more risky companies. But in either of
these situations, they won't just
find them tomorrow. So what they do is they
go to their investors and they get their investors
to commit a certain amount of money, to say
commit $100 million. And they'll get
the management fee on what those investors commit. But they won't take the
money right then and there. They'll take the
money as they need it. They'll do what's called a
capital call to their investors saying, hey, I just found a
good $5 million investment. I now need this percentage of
what you committed to so that I can go out and make the
investment in the hedge fund. That's not the case. All of it is up front. But it really is the
same compensation scheme. And that's why if you go to
any fancy business school, you'll find these are
kind of the careers that, at least the people
who are interested in-- I don't want to give them any kind
of characteristics-- there's a bunch of reasons why people
would want to go into these. But these are definitely
sought after careers at a lot of fancy
business schools.