A:

A hedge fund raises its capital from a variety of sources, including high net worth individuals, corporations and institutions; foundations; endowments; and pension funds. Hedge funds do not usually look for individual small investors such as the average person who purchases shares in a mutual fund, but instead seek out investors with large amounts of investment capital with whom to form a limited partnership.

A hedge fund begins with the person who serves as the general, or managing, partner of the limited partnership that forms the structure of most hedge funds. This is the person who makes the actual investment choices and decisions for the fund. He or she is typically an established investment adviser with a proven track record in managing investments and/or a unique, appealing investment strategy. This individual, sometimes with the assistance of some of the initial investors, seeks out potential investors to persuade them to invest in the fund.

Hedge fund managers are hampered in their efforts to raise funds by regulations that prevent them from publicly advertising a specific fund. They can, however, do things such as set up a general informational website that explains their investment strategies and provides information on their backgrounds and experience as investors, investment advisers or money managers. Fund managers often seek publicity by offering specific trading ideas on investment websites.

Hedge funds are usually, at least initially, marketed by the fund manager networking with friends or business acquaintances or through third-party placement agents, who are individuals or firms that act as intermediaries for asset managers such as pension fund managers or investment managers for a foundation or endowment. Sometimes fund managers offer "seed investment arrangements" to initial investors; in exchange for a substantial investment in the fund, the investor receives a discount on fund management fees or a partial ownership interest in the fund. These initial investors often do their own networking to solicit other investors. Hedge fund managers commonly produce some basic marketing materials to give prospective investors. Such material, referred to as a "pitch book" or "tear sheet," contains information on the fund's strategy and the fund manager and an outline of the terms for investing in the fund.

A large part of raising investment funds for a hedge fund depends on the initial performance of the fund manager. To get the fund started and establish an investing track record, the fund manager usually invests a substantial amount of his or her own money into the fund. If the fund manager performs exceptionally well, showing excellent returns on investment, the fund then begins to attract the attention of large institutional investors who have substantial amounts of capital available to invest. Good performance is also likely to elicit investment of additional capital from initial investors. The keys to raising investment capital for a hedge fund are for the fund manager to be able to find and convince some initial investors of his or her ability to manage the fund profitably, and then proceed to do just that so the fund attracts additional investors in the future.

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