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Hedge fund structure and fees | Finance & Capital Markets | Khan Academy

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Understanding how hedge funds are structured and how the managers get paid. Created by Sal Khan. Watch the next lesson: https://www.khanacademy.org/economics-finance-domain/core-finance/investment-vehicles-tutorial/hedge-funds/v/are-hedge-funds-bad?utm_source=YT&utm_medium=Desc&utm_campaign=financeandcapitalmarkets Missed the previous lesson? Watch here: https://www.khanacademy.org/economics-finance-domain/core-finance/investment-vehicles-tutorial/hedge-funds/v/hedge-funds-intro?utm_source=YT&utm_medium=Desc&utm_campaign=financeandcapitalmarkets Finance and capital markets on Khan Academy: Hedge funds have absolutely nothing to do with shrubbery. Their name comes from the fact that early hedge funds (and some current ones) tried to "hedge" their exposure to the market (so they could, in theory, do well in an "up" or "down" market as long as they were good at picking the good companies). Today, hedge funds represent a huge class investment funds. They are far less regulated than, say, mutual funds. In exchange for this, they aren't allowed to market or take investments from "unsophisticated" investors. Some use their flexibility to mitigate risk, other use it to amplify it. About Khan Academy: Khan Academy offers practice exercises, instructional videos, and a personalized learning dashboard that empower learners to study at their own pace in and outside of the classroom. We tackle math, science, computer programming, history, art history, economics, and more. Our math missions guide learners from kindergarten to calculus using state-of-the-art, adaptive technology that identifies strengths and learning gaps. We've also partnered with institutions like NASA, The Museum of Modern Art, The California Academy of Sciences, and MIT to offer specialized content. For free. For everyone. Forever. #YouCanLearnAnything Subscribe to Khan Academy’s Finance and Capital Markets channel: https://www.youtube.com/channel/UCQ1Rt02HirUvBK2D2-ZO_2g?sub_confirmation=1 Subscribe to Khan Academy: https://www.youtube.com/subscription_center?add_user=khanacademy
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Text Comments (27)
-tan s (12 days ago)
Lucid chart might be better than neyon drawing here.
Elyas reyimujian (14 days ago)
5:38 the guy who owns 30% of the funds wanted to take his 10% interest out, it should be 114.24m * 30% * 10%, but you just let him took the 10% of the entire fund when only owns 30% of the fund
David Charles Lloyd (2 months ago)
Excellent video
shibrik (7 months ago)
Is Pete’s Capital a stand alone fund ?
Mohammad Rahanjamian (1 year ago)
The guy that can't do a simple subtraction is trying to educate others about hedge funds.Just brilliant...
Rocksteady365mac (1 year ago)
Mohammad Rahanjamian subtracting is always difficult
Aaron Unchained (1 year ago)
Can you make a video on the Master & Feeder fund and how it is related?
Jack Faggie (3 years ago)
Now I can monetarily rule the world.
ivydude13 (3 years ago)
I thought the management 2% fee was paid up front. Is this true? Or is it trailing?
CyanideShock (3 years ago)
I think the reason why people are slightly confused as to how this all works is because the video explains each partners investment in terms of a percentage. Now, if you invest $30 Million into the hedge fund which now has $100Million in total assets, you essentially have a 30% stake, so when the total amount of assets go up by 20% over a year, the real worth of that partners money is now worth $36Million before fees. If he wants to take away 10% of his capital from the fund, he will now have $32.4Million invested, sure his overall contribution will be less to the hedge fund than what it was before (Hence the reduction from 30% to 20%) however, after all the withdrawrals and investments finish for that period, the percentage of total investments is calculated which might mean now investor 1 and 4 own a 25% in the hedge fund each, if no deposits were made during this time period.
scottab140 (4 years ago)
Real Hedge Funds Managers don't chose that type of accounting.
Vicki Bee (4 years ago)
Unfortunately, I would have to understand what the SEC is and why it matters, and why hedge funds don't want to recognize it. My friend was a hedge funds manager but his answers are more cynical than most people's. Anyway he said he preferred working as a Futures Trader, but I know nothing at all about that. 
Quickstep Training (5 years ago)
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Me (5 years ago)
How do you write on the screen like that? What software are you using?
TheMoneyTruth (6 years ago)
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David Ho (6 years ago)
So what happens if it is just paper profit? Do u get performance fees for that? Or do you actually have to sell and lock in the gains. Because how would value investing funds do it when they hold shares for years.
Coltrane Davis (6 years ago)
Thnx!
Cob Dole (6 years ago)
With that much money in the loanable funds market there wouldnt be any high interest accounts left on the earth.
xforestberryx (7 years ago)
confusing!
IJustMadeAComment (7 years ago)
@anbrin No, its abt 2% management fee, 20-40% typical performance fee. Performance fee is only taken if the management can exceed certain performance benchmarks that are set at the hedge fund. These benchmarks could be anything over 0% return, or it could be something like anything over 7% annual return. Typically, the benchmark is around 5-10% annual return. So, if the fund loses money, there is no performance fee accessed.
MDK83 (2 months ago)
Hi, you seem like you know something around the topic. With regards to the actual positions held by the hedge fund. At the time of the acceptance of a decrease or increase request in shares/interest/ownership etc, does the hedge fund manager automatically liquidate all of his positions/trades. If not, i.e. the liquidation is done by the manager after a decrease request is made, does he decrease each position equally (according to ratio of the position size vs total capital invested in the fund - is this regulated etc?), or can he liquidate positions as he sees fit.
Fatties09 (7 years ago)
@gotohellpunk Key is to know where you are, where you really want to be, and then figure out your method to get there.
gotohellpunk (7 years ago)
How do you get into this kind of work
viksra (7 years ago)
@shwraju007 Go to Google and type "ti 83 plus emulator" you can download it free
vinnie anthony (7 years ago)
using this example what happens to the 10% moving forward? I mean if you add up all the pieces it no longer adds up to 100%. Please help clarify.
Marko (7 years ago)
@elantra11 No, they would get their original amount + profits. The percentages are just illustrative. They would actually be dollar figures.
elantra11 (7 years ago)
Interesting. So the next person, who wants to redeem his share, the amount he gets will be based on what`s left...so if everybody want to redeem their lets say 10%, last person` 10% will be lower first person` 10% ?

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