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HEDGEDUCATION - FAQ


? Are hedge fund returns reported before or after fees?
? Can a qualified client place IRA or ERISA assets in a hedge fund?
? What are the tax implications of becoming a limited partner/investor in a hedge fund?
? What kind of fees do most hedge funds charge?


Are hedge fund returns reported before or after fees?

Most funds report their returns from previous years "net of all fees." This means net of management fees and net of incentive/performance fees. However, don't assume this; look carefully and if you are not sure, ask. Some funds report gross returns or returns net of management fees but gross of incentive /performance fees. Still others will report audited net of all fees returns with estimated/pre-audited net of all fees performance for the current year's performance. But regardless of which method is used, almost all funds state that their pre-audit figures are subject to adjustment by the partnership's auditor after the end of the year. These adjustments are almost always minor. If the adjustments are large, you should look for an awfully good explanation.
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Can a qualified client place IRA or ERISA assets in a hedge fund?

Usually qualified clients may invest IRA or ERISA assets in hedge funds; however, funds are limited in the amount of these assets they may accept. IRA investments in hedge funds makes a great deal of sense because of the deferral of taxes on capital gains. The details of this deferral should be discussed with an accountant before making an investment.
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What are the tax implications of becoming a limited partner/investor in a hedge fund?

At the end of each year a Hedge Fund as a limited partnership reports in a K-1 form gains or losses for the trades the fund made that year. These gains or loses are treated as are any other capital gain. It is important to note that the return of a fund is separate from the taxable gains and losses the fund has made over the course of the year. For example, it is possible that a fund may have "realized" a loss for tax purposes but have reported positive performance (capital appreciation) through unrealized gains. The opposite is also possible.
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What kind of fees do most hedge funds charge?

The majority of U.S. hedge funds charge the standard "one-and-twenty": 1% of assets and 20% of profits, annually (more precisely, the 1% fee is usually charged in .25% increments quarterly, in advance while the 20% is usually calculated annually). These are known as the "management fee" and "performance fee" respectively. There are many variations and embellishments, some fairly common. For instance, most funds observe a "high-water mark". This simply means that if, in a given performance fee period, a fund loses part of its investor's money; the investors will not be charged in later periods until the losses have been recovered. Another common variation is the "preferred return." This means that a fund will not collect a performance fee until a certain return is achieved. This is often fixed, say at 10%, or ‘floats’ along with some risk-free interest rate indicator.
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