Hedge Fund Definition
A hedge fund is an investment fund that pools capital from accredited investors or institutional investors and invests in a variety of assets with the aim of generating high returns. These funds are typically open to a limited number of investors and require a large initial minimum investment.
Hedge Fund Key Points
- Hedge funds are alternative investments using pooled funds with the aim of earning active return, or ‘alpha’, for their investors.
- They use different investment strategies to achieve returns, and hence, are often considered riskier than traditional investment funds.
- Hedge funds are usually exclusive, available only to particular investors with a significant initial investment.
- They are mostly unregulated by financial authorities, allowing more flexibility but also greater risk.
What is a Hedge Fund?
A hedge fund is a type of investment partnership. It involves a professional fund manager, who is given the task of managing the fund’s investments, and investors who provide the capital. The aim of a hedge fund is to maximize investor return and minimize risk, hence the name ‘hedge’ – providing a cushion against the market’s ups and downs.
Who can use Hedge Funds?
Hedge funds are typically available to ‘accredited’ or institutional investors – those who have a high net worth and can afford to take on the higher risk of hedge fund investing. They are not usually aimed at or open to ‘retail’ investors, that is, members of the general public investing smaller amounts.
Where are Hedge Funds used?
Hedge funds operate globally, investing in a wide array of areas such as shares, commodities, real estate, or startups. Despite attempting to ‘hedge’ against market volatility, their standpoint is riskier due to sometimes high levels of debt, speculative investment strategies and lack of regulatory oversight.
When are Hedge Funds used?
Hedge funds, unlike mutual funds, aren’t bought or sold on the open market. Instead, they have specific periods called ‘liquidity intervals’ when investors can choose to add or withdraw their money. Furthermore, most hedge funds have a ‘lock-up’ period during which investors cannot take out their money.
Why are Hedge Funds important?
Hedge funds play a significant role in financial markets by providing liquidity, increasing market efficiency, and allowing risk to be spread more widely. The funds’ aggressive investment strategies and their potential for high returns make them attractive to wealthy investors.
How do Hedge Funds work?
Hedge funds employ a range of investment techniques to generate returns. This includes short-selling (betting that a stock’s price will fall), leveraging (borrowing to amplify returns), and arbitrage (exploiting price differences). Fund managers often invest their own money into the fund, aligning their interest with that of the investors.
