Hedge Funds

Financial Dictionary -> Investing -> Hedge Funds

What is a hedge fund?

A hedge fund is an investment portfolio and fund that is privately managed by several seasoned investors in an aggressive manner with complex investment strategies, such as leverage, selling long, short and derivative positions in home and international markets with the aim of making big profits.

Hedge funds are usually set up as private investment groups with a strict number of experienced and trusted investors that share their "pot" with the group in order to make more returns that they all would on their own. Each investor has to deposit a large initial sum of money that has to remain in the fund for at least one year or an agreed time frame. One person is assigned as the investment manager. They will usually be the manager of several other Hedge Funds.

Similar to mutual funds investors have to pay a management fee, but the fund also collects a percentage of the profits also, which is usually around 20 percent. The flexibility of Hedge Funds counteracts any fees in the investors' minds.

Because Hedge Funds were created and are continued to be used by sophisticated and experienced investors they tend to have little regulation by the law and government, although for security the majority of the investors involved must be accredited, in that they earn a certain amount a year through investment and have a net worth of at least $1million. Funds are also not allowed to have any more than 100 investors.

Hedging means to reduce risk or to "hedge" around a situation, thus original hedge funds were created so wealthy investors could lower the risk of competition by joining forces. Because there is so much competition these days this meaning no longer reigns true, although the synergy of everyone working together lowers the risk of going at it alone.