what is a hedge fund?

Answer 1

Just type in "What is a hedge fund" at www.yahoo.com/search and all the top results will give a description of what it is.

The original term hedge fund was called hedge because the funds used to use a combination of long and short positions in securities as an investment strategy.

In today's press, hedge fund is a term that is generally used for investment funds that only accept high net worth individuals or institutional investors. Because they restrict the people who may invest in them they rely on an exemption from the Investment Company Act of 1940, which allows them to avoid certain diversification and disclosure requirements that on the one hand would limit their strategies but on the other hand represent investor protections. Also, because the funds are not publicly traded, they don't have to file 1934 Act reports.

Answer 2

As mentioned above, originally hedge funds were unregulated funds for high net worth individuals and institutions designed to reduce the risk in the markets and make money from this reduced risk.

Because the securities acts were written between 1933 and 1940, and there had been nearly 0% long term inflation since the founding of the Republic up to that point due to the gold and silver standards, the idea of indexing for inflation was non-existent. The securities acts place a high net worth person at $1,000,000 or an income of $250,000 for combined spouses. In 1933 this was about $14,000,000 in today's money. It was felt that people with that much money would not need governmental protection.

As a consequence of the sharp increase in US productivity, the level of wealth in America has become the highest of any group in the world's history. The average American produces 200 times the output as the average American did when the nation was founded.

Since there are now so many millionaires and high income people, brokers are circumventing the securities laws to bring people into unprotected investments because there are no limits of fees or agreement arrangements that are enforceable in the courts. You can get away with almost anything as long as you don't explicitly lie.

Because of this a hedge fund means any non-regulated investment pool. It is truly a buyer beware system. Any investor in such a fund should be sure they can enforce any legal claims in the event of fraud and be content to have nothing in the event of failure, but failure in the absence of fraud.

Answer 3

Ankit, a "hedge fund" is generally a fund that uses investments within a managed pool that are typically "unusual" in some way. They are primarily used by people with high net worths as an alternative to traditional investments like stocks, bonds or money market funds when there is an economic downturn or just to otherwise diversify their overall investment portfolios. Since they usually are designed to act differently in adverse economic or investment climates, they act as a counter or "hedge" to those more traditional investments (hence the name).

Many hedge funds use "derivative investments" such as options or futures, real estate, commodities or closely held business entities (limited partnerships, joint ventures, etc.) They usually managed by a top-notch portfolio management firm that specializes in these types of alternate investments.

Hedge funds typically have very large minimums ($500,000 or more) and are only for the "big boys" in the investment world. However there are smaller mutual funds and ETFs out there with much smaller minimums that sometimes invest in similar alternate investments (real estate, commodities, derivatives and so forth). They are usually less "managed" however, and it's up to you to carefully review those funds and see if they make sense in your personal portfolio. They should make up only a small part of your total investments.

Answer 4

Are pooled investments, which don't have the regulations that mutual funds have.

So hedge funds can use any investment strategy.

Answer 5

A Mutual Fund that can sell short stocks.