It’s still a high-paying job, but not necessarily the aristocratic luxury that many people think, especially considering the long hours worked and tremendous pressure to perform in an increasingly-volatile market.

And if the fund doesn’t beat the hurdle rate and/or watermark, there’s no additional compensation. Even managing $50 million, the annual management fee would likely be no more than $1 million (maybe less), and out of that the GP has to cover all its expenses and overhead, including staff, trading costs, technology and infrastructure, research, fundraising for more LPs, etc., which may only leave the fund manager with a salary comparable to a doctor or attorney. With some quick math, it’s easy to see that managing a smaller hedge fund isn’t as lucrative as many think. Some funds also use a high-watermark system where the GP only earns carry if the fund exceeds its historical peak. If the GP fails to meet the hurdle rate, they earn no carry. Most of the profits and losses are passed on to the LPs. For example, the hurdle rate might be 10% annualized, and so for any gains the fund makes beyond 10% during the year, the GPs may receive 20% of those gains as carry. The big gains for GPs come from carried interest, which is a percentage of the fund’s gains beyond a certain minimum hurdle rate. GPs are paid an annual management fee based on the total assets of the fund (historically about 2%) to cover their operating costs. LPs may consist of high net worth individuals, but most of the time are institutional investors like pension funds, banks, credit unions, insurance companies, state-owned enterprises, or endowed charities. The LPs provide most (sometimes all) of the capital, while the GPs actually manage the fund. This is a legal structure in which there are General Partners (GPs) and Limited Partners (LPs).

Who Runs Hedge Funds and How Do They Make Money?Ī hedge fund is typically structured as a Limited Partnership. While most people think of Wall Street elites trading billions of dollars in capital, there is actually no set minimum for the size of a hedge fund, and there are even very small hedge funds which may only manage about $5-10 million in capital. In other words, hedge fund managers typically have a lot more discretion than mutual fund managers, but you can think of a hedge fund as being kind of like a mutual fund for wealthier investors. The term ‘hedge fund’ has become synonymous with Wall Street greed, but is that an accurate, blanket characterization? A hedge fund can roughly be defined as an investment vehicle for accredited/sophisticated investors (who meet certain standards of income or net worth) or large institutional investors which, due to the restricted nature of who is allowed to invest in the fund, is subject to less regulatory requirements than other types of funds open to the general public (like a mutual fund). All investments carry risk, and you should consult with your financial advisor, accountant, and/or attorney prior to making any investment or trading decisions. I make no representations or warranties of any kind as to any of its content or the accuracy thereof. What I will attempt to do is alleviate some confusion about how the securities markets work and how that informs the context of the story.īut before I get to that, a disclaimer: This article is provided solely for informational purposes and should not be construed as personalized investment, trading, or financial advice. I’m not going to try and interpret the larger ideological significance of these events. If you’ve been paying even slight attention to the news this past week, you’ve probably heard about the historic price movements in GameStop (GME) stock, the Reddit / Main Street vs Wall Street hedge fund narrative, and multiple interpretations of what it all might mean.

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