what is a "hedge fund"?

Answer 1

The term Hedge fund dates back to the first such fund founded by Alfred Winslow Jones in 1949. Jones' innovation was to sell short some stocks while buying others, thus some of the market risk was hedged. While most of today's hedge funds still trade stocks both long and short, many do not trade stocks at all.

For U.S.-based managers and investors, hedge funds are simply structured as limited partnerships or limited liability companies. The hedge fund manager is the general partner or manager and the investors are the limited partners or members respectively. The funds are pooled together in the partnership or company and the general partner or manager makes all the investment decisions based on the strategy it outlined in the offering documents.

In return for managing the investors' funds, the hedge fund manager will receive a management fee and a performance or incentive fee. The management fee is computed as a percentage of assets under management, and the incentive fee is computed as a percentage of the fund's profits.

A "high water mark" may be specified, under which the manager does not receive incentive fees unless the value of the fund exceeds the highest value it has achieved. The "high water mark" is intended to encourage fund managers to recoup losses, but is viewed by critics as encouraging laggard funds to close, to the detriment of investors.

The fee structures of hedge funds vary, but the annual management fee is typically 20% of the profits of the fund plus 2% of assets under management. Certain highly regarded managers demand higher fees. In particular, Steven Cohen's SAC Capital Partners charges a 50% incentive fee (but no management fee) and Jim Simons' Renaissance Technologies Corp. charged a 5% management fee and a 44% incentive fee in its flagship Medallion Fund before returning all investors' capital and running solely on its employees' money.

Assets under management of the hedge fund industry totaled $1.225 trillion at the end of the second quarter of 2006 according to the recently released data by Hedge Fund Research Inc. (HFR).

The bulk of hedge fund assets are invested in funds that employ "long / short" equity strategies. Other hedge funds use alternative strategies such as selling short, arbitrage, trading options or derivatives, using leverage, investing in seemingly undervalued securities, trading commodity and FX contracts, and attempting to take advantage of the spread between current market price and the ultimate purchase price in situations such as mergers. When strategies become extremely complex they may acquire potential and unanticipated risk of catastrophic losses as in the case of Long-Term Capital Management.

Answer 2

Ignore all those other answers. Here's the real scoop. Hedge funds are like mutual funds, but they are designed to do well even in bear markets; they use strategies like shorting the market, trading currency futures and etc. Also, unlike mutual funds they are privately owned and thus not subject to federal regulations.

Answer 3

It's like a mutual fund with less restrictions. If you are asking if so you can start one, check here ...

http://www.turnkeyhedgefunds.com/

If you are planning to invest in a hedge fund, you really need to get to know your fund manager and find out past returns. Good luck.

Answer 4

A Hedge fund is a charity donation set up to help pornstar Ron Jeremy keep his back hair shaved and under control. Ron Jeremy is known as the Hedghog because he is such a fat hairy tub of goo.