Hedge Fund
What Is a Hedge Fund?
A hedge fund is a type of investment vehicle and business structure that pools capital from accredited individuals or institutional investors and invests in a variety of assets, often with complex portfolio-construction and risk-management techniques. It is run by a professional investment manager.
Hedge funds are different from mutual funds and other types of traditional investment portfolios in a few ways:
Investment Strategies: Hedge funds may use aggressive strategies that are not typically used by mutual funds, such as using leverage (borrowed money), short-selling (betting that a security's price will fall), or investing in derivative instruments like options and futures. They often aim to achieve high returns irrespective of the overall market condition.
Regulation: Hedge funds are less regulated than mutual funds, which means they have more flexibility in their investment choices. However, they are often only open to accredited investors, who are usually high-net-worth individuals or institutional investors.
Fees: Hedge funds often charge both a management fee and a performance fee. The typical "2 and 20" fee structure charges a 2% annual management fee on the total asset value and a 20% performance fee on any profits earned.
Redemption terms: Hedge funds often require investors to lock their money for a certain period of time, known as the lock-up period, during which investors cannot withdraw their funds. After this period, withdrawals are usually only permitted at certain intervals, often quarterly or biannually.
Hedge funds got their name from the practice of "hedging" against market downturns. However, not all modern hedge funds aim to hedge against market downturns, and many focus on maximizing returns instead. The level of risk associated with a hedge fund depends on the specific investment strategies it employs. Some hedge funds can be extremely risky, while others may be more conservative.