Training · HF-1 · Lesson 01 of 06
The hedge fund industry
The rule
Funds differ by mandate, leverage and holding period. Two funds both called 'long/short' can be unrecognisable once you read the risk limits.
Size and structure
The industry manages several trillion dollars across thousands of funds, but assets are concentrated: the largest few hundred managers hold most capital. Multi-manager platforms, which allocate to dozens of independent PM teams with strict risk limits, have taken a growing share.
Fees in practice
Traditional '2 and 20' has drifted lower for many funds, while top multi-managers charge pass-through expenses that can exceed traditional fees. Performance fees are subject to a high-water mark: the manager earns no incentive fee until previous losses are recovered.
- Gross return
- 15% → $150m
- Management fee 1.5%
- $15m
- Profit after mgmt fee
- $135m
- Performance fee 20%
- $27m
- Net to investors
- $108m (10.8%)
Exposure and leverage
Gross exposure is longs plus shorts as a percentage of capital; net exposure is longs minus shorts. A fund 120% long and 80% short is 200% gross, 40% net. Gross measures how much capital is at work; net measures directional market risk.
- ·Low net (0–30%): market-neutral, returns from stock selection.
- ·Moderate net (30–70%): classic long/short equity.
- ·High net: closer to a concentrated long-only fund.
Liquidity and investor terms
Funds offer monthly or quarterly redemptions with notice periods and sometimes lock-ups. Terms should match the liquidity of the assets: a distressed debt fund cannot offer monthly liquidity safely. Mismatches cause forced selling in crises.
Careers across fund types
Single-manager funds give analysts broader exposure to the PM's thinking. Multi-manager pods offer faster responsibility but tight drawdown limits — a PM who loses 5–7% may be cut. Choose deliberately; the cultures differ as much as the strategies.
Hold onto this
- ·Typical fee: 1.5-2% management, 20% of gains, with a high-water mark.
- ·Net exposure, gross exposure and liquidity describe how much risk the fund can actually carry.
- ·Fund size caps strategy: a $10bn fund cannot trade a small-cap idea.
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Education, not financial advice. Figures may be simplified for illustration.