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What
is a hedge fund?
Hedge funds are private investment pools that can employ
a number of strategies that are unavailable to the traditional
investments, like mutual funds. Some of these strategies
include short selling, use of leverage, program trading,
swaps, arbitrage and derivatives. The principal objective
of most hedge funds is to reduce volatility and risk while
attempting to preserve capital and deliver positive returns
under all market conditions. Generally, hedge funds are
restricted, by law, to less than 100 investors, and the
minimum individual investment is typically in excess of
$1 million. Management of a hedge fund usually receives
performance-based compensation.
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What
is the difference between hedge funds and mutual funds?
Hedge funds are extremely flexible in their investment options
because they use financial instruments generally beyond the
reach of mutual funds, which have SEC regulations and disclosure
requirements that largely prevent them from using short selling,
leverage, concentrated investments, and derivatives. This
generally limits mutual funds to profiting only under favorable
market conditions. Hedge funds, on the other hand, can utilize
a variety of investment strategies and techniques, enabling
them to profit in both up and down markets.
Mutual fund managers are
generally paid via a management fee that is not indicative
of their performance. Hedge fund managers, however, are paid
on a performance basis. If the hedge fund is successful, managers
will earn profits in the form of an incentive allocation.
The manager's compensation is based upon his or her performance.
Hedge funds are typically
restricted to only 100 investors. For this reason, investment
requirements are usually set at a minimum of $1 million. Mutual
funds have no regulation as to the number of investors. Thus,
their investment minimums are considerably lower.
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What
is a fund of funds?
A fund of funds is a diversified portfolio of hedge funds,
which provides investors access to multiple funds and multiple
strategies. The PDP fund of funds utilize numerous investment
strategies within the hedge fund sector, to quantitatively
construct a fund of funds that hedges against sector specific
risks and macro market risk. Fund of funds are also referred
to as multi-manager funds.
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Why
invest in a fund of funds?
A fund of funds offers accredited investors and qualified
purchasers the ability to diversify their investments. Instead
of placing all available assets under the discretion of
a single hedge fund manager, a fund of funds provides exposure
to multiple managers and strategies. In this manner, the
PDP fund of fund reduces the risk, which is inherent in
individual hedge fund investments, while maintaining the
historical returns of individual hedge funds.
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Are
fund of funds more or less risky as compared to the traditional
hedge fund?
The diversification of assets, among multiple hedge fund
managers, allows investors to minimize risk by allocating
only a small portion of capital to any one manager.
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How
can you get into a closed hedge fund?
Many of the top performing hedge funds, throughout the world,
are closed to new accredited investors. This situation prevents
any private or institutional investor seeking absolute return
from investing in these funds. PDP Capital Investments is already invested
in some of these hedge funds that have been closed to new
investors. Therefore, our clients can invest in these funds
through PDP's existing relationships and fund of funds products.
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What
is an accredited investor?
An accredited investor is a designation for an individual
or entity meeting any of the criteria listed below. Certain
restricted offerings, limited partnerships, and angel investor
networks are open only to accredited investors and/or qualified
purchasers. Generally, the accredited investor is:
- Any director, executive officer,
or general partner of the issuer of the securities being
offered or sold, or any director, executive officer, or
general partner of a general partner of that issuer.
- Any natural person whose individual
net worth, or joint net worth with that person's spouse,
at the time of the purchase, exceeds $1,000,000.
- Any natural person who had individual
income in excess of $200,000, in each of the two most
recent years, or joint income with that person's spouse
in excess of $300,000 in each of those years, and has
a reasonable expectation of reaching the same income level
in the current year.
- Any trust with total assets in
excess of $5,000,000, not formed for the specific purpose
of acquiring the securities offered, whose purchase of
the securities is directed by a person who has such knowledge
and experience in financial and business matters, that
he is capable of evaluating the merits and risks of the
prospective investment.
- Any organization that was not
formed for the purpose of acquiring the securities being
sold, with total assets in excess of $5,000,000.
- And, any entity in which all
of the equity owners are Accredited Investors.
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