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Benefits of Hedge Versus Mutual Funds
- Tendency for superior track records with higher performance, lower volatility, lower drawdown and capital preservation.
- Possible capital appreciation in bull, bear, inclining, declining and directionless markets due to flexible market correlation and beta, with long exposure (expected capital appreciation when a market inclines) and short exposure (expected capital appreciation when a market declines) as well as exposure to positively and negatively correlated assets (assets expected to appreciate and depreciate in same market conditions).
- Absolute instead of relative benchmark objectives, avoiding justification of poor or negative performance because it is higher or less negative than the performance of a market or an index.
- Transparency due to incentive to create credibility.
- Capital preservation, investment risk moderation and accountability due to co-investment by principal, family and friends.
- Fee structure dependent on performance success due to reliance on incentive fee (annual percentage of net profits) instead of management fee (annual percentage of net assets), front load fee (upfront entry fee charged by mutual funds, generally up to 8.5% of assets invested) and back load fee (deferred exit fee charged by mutual funds, generally up to 6% of assets redeemed).
- Tendency for exceptional track records due to relatively small asset base, agility and critical importance of performance success.
- High transparency due to significant incentive to create credibility.
- Capital preservation, investment risk moderation and accountability due to significant co-investment by principal, family and friends.
- High liquidity due to unattractiveness to investors of lock up of their capital.
- Fee structure heavily dependent on performance success due to substantial reliance on incentive fee because management fee tends to be small.
- Possibly discounted or negotiable management and incentive fee structure due to early stage of hedge fund development and desire to attract investors.
Benefits of Emerging Versus Mature Hedge Funds