A private investment fund is a private company that manages the financial investments of a select group of wealthy individuals. To be considered a private investment fund, the company must manage no more than 100 individual investors and each investor must have considerable personal wealth, which is generally valued at over $1 million US Dollars (USD). These stipulations are required because private investment funds are largely exempt from the rules and regulations of the securities exchange market.
Each country has its own regulatory body. In the US, it is called the Securities and Exchange Commission, in Canada, it is the Canadian Securities Administrators and in the UK, the overseeing body is the Financial Services Authority. These various regulatory bodies do not control the actions of any private investment fund because this type of company caters to more sophisticated investors. These wealthy individuals are assumed to be without the need of the protective stance of the various regulatory bodies because of the size of their personal portfolios.
A private investment fund operates much like a mutual fund in the sense that it is also a pool of money from various investors that is jointly invested. The money put into a private investment fund usually needs to be committed for about one year because the fund managers are free to enter into more complex financial arrangements that may take a longer time to mature. The ability to have a wider choice of investment vehicles is one of the advantages of avoiding registration with financial services regulatory bodies. It is also one of the reasons wealthy investors in search of the chance of superior gains choose to use them.
A hedge fund is an example of a private investment fund. Hedge funds conform to the descriptions given and are usually managed by a team of qualified financial experts. While the meaning of the term "to hedge" was originally associated with mitigating risk, hedge funds have developed into risk-seeking investment vehicles because they are mandated to maximize investment return. The members of the private investment fund are all aware of the risks involved because of their sophisticated financial knowledge, but they choose to place a higher value on return over risk.
The managers of a private investment fund are paid via a combination of a management fee and a performance fee. The management fee is usually calculated on the net asset value (NAV) of the fund and is paid either quarterly or monthly depending on the specific arrangement. Performance fees are a form of incentive payment to urge the fund manager to achieve investment goals and are normally calculated on the increase in value over the original NAV.