What is a hedge fund?

Question

Please explain in simple terms. Financial jargon makes no sense to me.

Answer 1

That is a good question because hedge funds and their strategies vary, so any definition would be general and broad. The first thing to know about hedge funds is that they are unregulated, unlike mutual funds or financial advisory firms which are heavily regulated by the SEC. Because hedge funds are not regulated they are not covered by fdic, insuring your funds from risk so you can stand to lose everything by investing in a hedge fund. The goal of the hedge fund is to increase your investment by a significant amount. The hedge fund does this by engaging in risky transactions such as short selling, options, swaps and other strategies. To really appreciate what a hedge fund does you have to be aware of these strategies and their risk. Finally, eventhough hedge funds are not regulated in general by regulation they can only have ten investors at one time. Because they can only have ten investors at one time, hedge funds usually work with clients who are able to invest at least half a million. If you have any questions feel free to contact me.

Answer 2

A hedge fund is a pool of money managed by a professional investment manager. Individuals can buy shares in the fund, in the same way you might buy shares in a mutual fund.

Typically hedge funds have a much higher minimum investment level than mutual funds (usually several million), terms and conditions negotiated with each investor governing when they can withdraw their money and very high charges based on the performance of the fund. That means if the hedge fund grows faster than the overall stock market the investment manager will take a large percentage of the profit as their management charge.

Hedge funds are regulated much more lightly than mutual funds & in many cases don't even have to be registered with the regulator. They invest much more agressively than mutual funds and use derivatives and other high risk investments. They sell stock short (sell stock they don't own) and take very large or majority positions in companies.

This approach makes very high profits when they are able to correctly predict market moves. However when they get their bets wrong they can loose a lot of money very quickly. Hedge Funds made very large profits between Jan and May this year. They then lost all their profits in less than a month because the market moved in a direction they weren't expecting.

Answer 3

It a huge hedge at the end of 'Farmer Brown's' driveway in Topeka, Kansas. He started 'the hedge fund' to make some extra money after his corn crops got wiped out by a tornado. It's a scam, don't invest in it.

Answer 4

A hedge fund is an investment fund that is able to have more freedom in investment strategy by investing in commodities, currencies, bonds, equities, options, futures, and other derivatives, as well as in real companies. The managers are compensated based on assets under management as well as performance. They can sell securities short as well as use leverage to achieve their objectives.

Answer 5

A hedge is an investement that goes up when most other investments go down.

The idea is if you put some of your money in hedge funds, you'll never be in a position where you lose it all.

Answer 6

An aggressively managed portfolio of investments that uses advanced investment strategies such as leverage, long, short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark).

Legally, hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment. Investments in hedge funds are illiquid as they often require investors keep their money in the fund for a minimum period of at least one year.


For the most part, hedge funds (unlike mutual funds) are unregulated because they cater to sophisticated investors. In the U.S., laws require that the majority of investors in the fund be accredited. That is, they must earn a minimum amount of money annually and have a net worth of over $1 million, along with a significant amount of investment knowledge. You can think of hedge funds as mutual funds for the super-rich. They are similar to mutual funds in that investments are pooled and professionally managed, but differ in that the fund has far more flexibility in its investment strategies.

It is important to note that hedging is actually the practice of attempting to reduce risk, but the goal of most hedge funds is to maximize return on investment. The name is mostly historical, as the first hedge funds tried to hedge against the downside risk of a bear market with their ability to short the market (mutual funds generally can't enter into short positions as one of their primary goals). Nowadays, hedge funds use dozens of different strategies, so it isn't accurate to say that hedge funds just "hedge risk". In fact, because hedge fund managers make speculative investments, these funds can carry more risk than the overall market.

Answer 7

A hedge fund is monies set aside from your primary investments. It often has a lower, more constant interest rate than other accounts. It's sort of like putting money in a jar and burying it in the backyard. It may not do much for increasing your wealth, but it'll always be there!

Answer 8

A private investment fund or pool that trades and invests in various assets such as securities, currency, and derivatives on behalf of its clients, typically wealthy individuals.