Separate accounts and hedge funds are similar investments in that they both involve pooled money to buy securities. The difference is, with a separate account the investor directly owns the securities instead of owning a share of the pool. The expenses incurred in separate accounts and hedge funds tend to be higher than traditional investments, though the fees and expenses for hedge funds are higher. Both types of investments take a more personalized approach to money management than other forms of investment, which is why they tend to charge higher fees. Be sure to take a close look at all of the fees and expenses. Due diligence on your part will make sure you keep your money working for you instead of funding somebody else’s yacht.
Both separate accounts and hedge funds typically require significant minimum investments. However, the entry expenses for a hedge fund will be more than for a separate account. For separate accounts, the minimum investments tend to start around $100,000 mark. For hedge funds, the minimum investments are much higher. Entry expenses for hedge funds can be as high as $1 million.
The annual expenses for separately managed accounts and hedge funds are both higher than for traditional investments. Annual fees for hedge funds are the highest. Separate accounts levy an annual fee of 3 percent of the total assets. Hedge funds charge a lower annual fee of 1 percent to 2 percent of assets, but hedge funds also include a performance fee of 20 percent of fund assets.
Transaction expenses can include operational and overhead expenses such as in-house trading platforms, which separate account and hedge fund managers will roll into the expense schedule. These expenses will be specific to the individual funds. However, because these types of investments are less regulated than traditional investment products, it’s a good idea to ask questions about them.
Alternative investments such as separate accounts and hedge funds are not as heavily regulated by the Securities and Exchange Commission as traditional investments like mutual funds. As a result, they do not offer investors prospectuses per se. Instead, fund managers outline their expense structures in Form ADV Part 2 forms, which are specialized regulatory filings available on the SEC's Investment Adviser Public Disclosure (IAPD) website. Expenses can be inflated by such items as proxy fees, which some fund managers levy even though the investors do not receive proxy votes or other proxy materials. Read the Form ADV carefully, and ask questions if you see fees that don’t make sense to you.
- Encyclopedia of Alternative Investments; Greg N. Gregoriou
- Forbes: Here's A Return Ticket To The Stock Market
- Investor.gov: Hedge Funds
- U.S. Securities and Exchange Commission: Form ADV
- FINRA: Investors: Funds of Hedge Funds—Higher Costs and Risks for Higher Potential Returns
- U.S. Securities and Exchange Commission: Petitions: Petition for Immediate Regulatory Action Regarding Issuer Invoice Payments to Broker-Dealers for Separately Managed Accounts
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