Hedge Funds

What is a hedge fund?

A hedge fund is a form of a mutual investment fund (link to mutual funds page). Hedge funds are usually private funds which are open to only a limited number of investors, most notably to wealthy or professional investors.

A hedge fund is typically managed by a professional investment manager. The investment manager receives fees based on his performance, which directly translates into the fund’s performance.

Hedge funds utilize a wide variety of investment strategies, the most commonly used of which is short-selling, which is a form of hedging – hence the name. Hedging of investments, through for example short-selling, is done in order to minimize the risk of a dramatic price change in another long position in the same or different market. Through short-selling a different position in the same market for the same value as the investment in an initial long position (investment in shares of a specific company for example) you are protecting your initial investment from dramatic market-wide price changes that could ruin your initial investment. This is just one of the many ways hedge funds use hedging of their investments in order to minimize exposure to the risks that price changes bring.

Every hedge fund has a different investment strategy but nearly all of them utilize hedging in varying degrees. Some hedge funds specialize in purely short-selling in order to attain high return on investment (ROI), but this in turn exposes them to greater risks, as short-selling when used out of the context of hedging (without a long position) is a very speculative form of investment.

There are some key differences between hedge funds and mutual funds. All mutual funds are regulated by different governing bodies depending on the location that the mutual fund is operating out of. For example mutual funds in the USA are regulated by the U.S. Securities and Exchange Commission. Hedge funds are however not regulated and many of them are based in offshore locations.

Nearly all mutual funds can be invested into by anyone willing to invest their money, whether they are an institution or a private individual. Hedge funds on the other hand are only open to a limited amount of accredited investors – wealthy individuals or organizations.

Mutual funds are required to be priced on a daily basis, so that their investors are able to liquidate their position in the fund at any time they desire. This is in stark contrast to hedge funds, most of which aren’t priced at all and also practice lock-up periods – investors are unable to liquidate their position in the hedge fund for a certain period of time.

Finally most hedge funds are completely non-transparent to third parties, as a private operating entity they are not required to disclose their activities or even provide quarterly reports – something all mutual funds are required to do.

Hedge Funds:

HEK Portfolio Managers
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Subjects keywords: Hedge funds, Definition of Hedge fund, Forms of Hedge funds, Hedge funds investments. All information about Hedge funds.