Hedge Funds

• A hedge fund is an investment tool that works similar to a mutual fund. Hedge fund managers collect funds from several investors, pool those funds and use them to invest in different markets. Hedge funds come with a level of risk. If the market the hedge fund invested in does poorly, investors stand to lose their investment. Unlike mutual funds, hedge funds do not have to register with the Securities and Exchange Commission.
  
  

Performance Fees

• The majority of hedge funds charge a performance fee. Gaebler reports that most hedge funds charge a 20 percent performance fee. Typically, a hedge fund manager will impose this fee once a year. The performance fee is directly related to how well the hedge fund performs, and is sometimes known as an incentive fee for this reason. The better a hedge fund performs, the more a manager can charge in performance or incentive fees.
  
  

Other Fees

• Nearly all hedge funds also charge a management fee, which can range from 1 to 2 percent of the asset, according to Gaebler. Management fees are imposed several times a year. Some hedge funds also charge a surrender fee, which is imposed if an investor wants to reclaim a portion of his assets. This fee is used to discourage investors from pulling out of the hedge fund.
  
  

Hurdle Rates

• A few hedge funds may offer a hurdle rate. This prevents managers from collecting a performance fee if the hedge fund performs poorly. For example, if the hedge fund has a 4 percent hurdle rate and the fund only returns a 3 percent profit, the manager cannot collect a performance fee that year. Having a hurdle fee in place can help protect investors from further losses on a poor-performing hedge fund.