Why are hedge fund managers so rich?

Hedge funds make money by charging a management fee and a percentage of profits. The typical fee structure is 2 and 20, meaning a 2% fee on assets under management and 20% of profits, sometimes above a high water mark. For example, let's say a hedge fund manages $1 billion in assets. It will earn $20 million in fees.

They pay managers handsomely.

So if the fund manages $1 billion and it generates a 25% return ($250 million), the manager is paid 2% of $1 billion ($20 million), plus 20% of the returns exceeding a 5% hurdle, or $40 million. This is how successful managers of big hedge funds become billionaires.

Because they are not as regulated as mutual funds or traditional financial advisors, hedge funds are only accessible to sophisticated investors. These so-called accredited investors are high net worth individuals or organizations and are presumed to understand the unique risks associated with hedge funds.

A hedge fund raises its capital from a variety of sources, including high net worth individuals, corporations, foundations, endowments, and pension funds.

Stocks Elon Musk doesn't buy

Musk isn't a hedge fund manager and isn't required to disclose relatively small investments.

Employees are often required to sign stringent non-compete agreements, ostensibly to protect trade secrets. And even basic information like fund returns is not commonly reported publicly. The conventional wisdom is that this lack of transparency is a trade-off for better performance.

At least 10 years of investment experience and a proven performance record are required to become a hedge fund manager. Hedge fund managers need excellent investment, analytical, and stock-picking skills in order to effectively manage their fund and generate strong returns for investors and general partners.

Hedge funds set high barriers to entry, which screen out most investors. Hedge funds tend to have specific characteristics and features. They require wealth to participate. Hedge funds typically require an investor to have a liquid net worth of at least $1 million, or annual income of more than $200,000.

Are Hedge Funds Legal? Yes, they are legal. That is, if they are doing the right thing. The usual problems that present are insider trading and market manipulation.

The Bottom Line. Hedge fund investment is considered a risky alternative investment choice and requires a high minimum investment or net worth from accredited investors. Hedge fund strategies include investment in debt and equity securities, commodities, currencies, derivatives, and real estate.

Hedge funds pool investors' money and invest the money in an effort to make a positive return. Hedge funds typically have more flexible investment strategies than, for example, mutual funds.

Private Equity and Hedge Funds

While they aren't the same thing, these two types of investment tools are popular among billionaires. They appeal to people of high net worth who can afford large investments and higher risk. Such people are sometimes categorized as sophisticated investors or accredited investors.

If you are at a fund like a multimanager hedge fund where every day you either make money or you don't and your investment horizon is very short, the job will be extremely stressful.

Ken Griffin, the hedge fund billionaire, is simply one of the biggest names in finance. His Citadel hedge fund had a record-breaking $16 billion return last year, when many were wrong-footed by a brutal bear market. Now A.I. has the market soaring, but Griffin is again twisting where others are turning.

BlackRock manages US$38bn across a broad range of hedge fund strategies. With over 20 years of proven experience, the depth and breadth of our platform has evolved into a comprehensive toolkit of 30+ strategies.

Phil Falcone

However, life wasn't always this way for the hedge fund titan. Falcone, the youngest of nine children, grew up poor in a small home in Chisholm, Minnesota. His father was a utility superintendent and his mother worked at a factory.

The median manager earned $570 million — the fourth best in 22 years — and the seven highest earners all made at least $1 billion. The top earner was Ken Griffin, founder of multistrategy giant Citadel. He personally made $4.1 billion — the most any hedge fund manager has ever earned in the history of the Rich List.

Let's start with the youngest billionaire in the world;

Two years later, PayPal was sold to eBay for $1.5 billion, which allowed Musk to found and invest in several of the companies he still has today. Musk invested in his cousins' solar energy company, SolarCity, back in 2006; it was acquired by Tesla ten years later for $2.6 billion in stock.

In short, Warren Buffett is not a hedge fund manager, and Berkshire Hathaway is not a hedge fund. Buffett is one of the few billionaires who amassed a fortune by building a successful business and managing a stock portfolio simultaneously.

Hedge fund managers typically earn above average compensation, often from a two-and-twenty fee structure from investors. Hedge fund managers typically specialize in a particular investment strategy that they then use as their fund portfolio's mandate.

Some strategies, such as managed futures and short-only funds, typically have higher probabilities of failure given the risky nature of their business operations. High leverage is another factor that can lead to hedge fund failure when the market moves in an unfavorable direction.

Most hedge funds are well run and do not engage in unethical or illegal behavior. However, with intense competition and large amounts of capital at stake, there are less than scrupulous hedge funds out there.