Question

Answer these two questions based on all three of venture capital funds, private equity funds, and hedge funds please!!!



3. What is the legal structure of funds, i.e. how are they structured? What is the means by which most fund managers are compensated?

            

4. Funds are lightly regulated by the SEC or Federal Reserve. What do you think some of the benefits and risks of that light regulation might be?

Answer 1

Legal structure as below:

In these funds, there is generally two type of partners. There is a general partner (GP) and a local partner (LP). LP are th investors in the fund. For the investment in the fund, they will generally own the units issued by the fund. There will be a team of investment managers, managing the fund money. They are general partners. LP will put in money and GP will do the investment on behalf of the fund. GP is also allowed to invest in the fund. Generally, funds wor with 80-20 rule wherein, 80% of the profits are distributed to the LP and 20% to the GP as performance fees. GP alos earns money by the way of management fees.

Funds are generally loosely regulated by SEC. These helps in investing into riskier assets to generate high returns. Morever, funds can take leverage and invest into the companies. Hedge generally exploit this by taking long or short positions and make use of derivatives to generate high retruns. There are a lot of risks involved as well. For example, fund manager can take a lot of risk to generate high performance fees thereby puttting the capital of investors at risk. Managers may not prudent in proper capital allocation.