DRAFT TL-RR Hedge Funds

certain times throughout the year, and may be capped at a maximum percentage referred to as redemption gates. Often, hedge fund managers require investors to maintain their investment in the fund for some minimum time period (called a “lockup period”), such as one year. Private investment partnerships may be open to a limited number of investors and require a large initial minimum investment (such as $1 million to $20 million). While private partnership structures originally were the norm, the term “hedge fund” now represents different types of funds employing nontraditional portfolio management techniques, regardless of the legal structure. Today, many of the bestknown hedge fund strategies are accessible via mutual funds. These liquid hedge fund strategies offer many benefits, including greatly expanded access compared with that of traditional private placement funds, which typically require clients to meet certain SEC-mandated

HISTORY

Hedge funds are not a new concept. Alfred Winslow Jones created the first long/short equity (hedge) fund in 1949. At the time, it was a rather innovative concept, and it opened the door to the investment vehicles that we consider modern hedge funds. Through this first hedge fund, Mr. Jones was able to create positive returns during both rising and falling equity markets and produce a smoother return profile for investors by decreasing the downside risk of the portfolio. The fund experienced strong annualized performance of nearly 22% from 1949 to 1968, compared with the S&P 500 Index return of approximately 12% over that same period. In 1966, the first long/short equity mutual fund, the Hubshman Fund, was launched. Over the decades, long/short equity investing has become a staple for many institutional pension and endowment fund portfolios, either incorporated as a dedicated strategy or as a sleeve of multi- strategy funds. Meanwhile, the number of other strategies employed in hedge funds has risen substantially (see STRATEGY DESCRIPTIONS section).

With assets of more than $2 trillion, hedge funds are not an asset class but a group of different manager strategies. Whether the hedge fund is structured as a limited partnership, mutual fund, or separate account, investors in hedge funds are relying on a manager’s investment skill set to execute a particular strategy. The level of risk varies greatly among hedge fund

strategies and may depend on the manager’s use of leverage and derivative instruments, among other factors. HEDGE FUND LEGAL STRUCTURES Investments in private partnership hedge funds are generally illiquid, with withdrawals that are allowed only at

COMPARISON OF DIFFERENT STRUCTURES

LIMITED PARTNERSHIP/PRIVATE PLACEMENT FUND

MUTUAL FUND

Access

Limited; investor must meet certain criteria (such as $5 million in investable assets) Typically high (such as $1 million) Typically one to two years Typically quarterly, but can vary  Virtually unlimited Typically opaque; at manager’s discretion Often employed, but not always; can be very high (such as 10x) Typically quarterly, but can vary Typically 2% Structured in a variety of ways (such as 20% of profits above a 5% hurdle)

 None

Minimum Investment Lockup Periods Investor Liquidity Strategies Available Holdings Transparency Leverage Valuation Frequency Management Fees Performance Fees

 Typically none  None  Daily Somewhat limited

 Moderately transparent  Constrained by the SEC; typically no more than 30% (1.3x)  Daily  Typically 1% to 2%  Typically none

Regulatory Oversight Tax Form

 Full

Limited

K-1; can be delayed

 1099

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