What Are GP Stakes?

Hedge funds first began to appear in the late forties in America. Initially, such enterprises were engaged in the fact that they made money on rising and falling stocks – they watched them, bought and sold shares. Now, hedge funds already have currencies, precious metals, futures, etc.

What are hedge funds?

A hedge fund is an investment fund that pools investors’ money and invests it to get the maximum return with the least possible risk.

Hedging is an action, the purpose of which is to reduce market risks and adverse changes in asset prices. They help to minimize possible financial losses. For example, an investor bought shares but is afraid their value may fall. Then he can open another opposite position to compensate for potential losses. When hedging, the investor transfers the risks to speculators who are ready to accept them.

What is investing in GP shares?

GP share investment is an investment method where funds are immediately channeled into equity, representing a minority stake in the company’s general manager. This type of investment is now widely used as opposed to investing in LPs, as the latter is non-strategic and has no voting rights in the company. Investments can be made by both open and closed funds.

In 2021, the activity of such investments increased significantly and companies that offered SOE investments managed to attract more than $20 billion of capital. Recently, it has even become one of the classic investment strategies.

The structure of hedge funds in the US

Hedge funds collect investors’ money and invest it in various assets. These can be, for example, stocks, bonds, real estate, precious metals, currencies, futures, options, and other hedge funds. The younger the fund, the more often it has the money of its founders, and the founders’ interests coincide with the interests of clients.

In the US, the IRS notes that hedge funds typically consist of two entities. The first is created as a partnership (partnership) and acts as an investment manager (IM), and the second functions as a general partner (GP) of the central fund. IMs are responsible for portfolio investments, while GPs are the founders and fund managers who form the fund, oversee investment strategy, pay bills, and collect fees.

The IM usually receives 2% of the net asset value of the underlying fund. In contrast, the GP receives an incentive fee based on the performance of the underlying fund in the form of a distribution of partnership profits. Usually, it is 20% of the profit. This reward structure is also called “2/20”.

Who can invest in hedge funds

As for the US, as a rule, to invest in hedge funds, you need to be an accredited investor, that is, to have a certain level of annual income, net assets, and invested funds.