What is a Hedge Fund?

Answer 1

A fund, usually used by wealthy individuals and institutions, which is allowed to use aggressive strategies that are unavailable to mutual funds, including selling short, leverage, program trading, swaps, arbitrage, and derivatives. Hedge funds are exempt from many of the rules and regulations governing other mutual funds, which allows them to accomplish aggressive investing goals. They are restricted by law to no more than 100 investors per fund, and as a result most hedge funds set extremely high minimum investment amounts, ranging anywhere from $250,000 to over $1 million. As with traditional mutual funds, investors in hedge funds pay a management fee; however, hedge funds also collect a percentage of the profits (usually 20%).

Answer 2

Mr. Workreallybites is right that you should first understand a pure hedge. But I think he is giving you a more complex futures trading lesson. Here is my "pure hedge" lesson.

My dad used to run a seed processing plant. He bought a shipment of farm seed in the fall and then immediately "shorted" the same amount in the commodities market. So he then had a large amount of seed sitting in his warehouse, but was market neutral in the sense that the market value of the seed could go up & down and have no effect on him. If he simple sold the warehouse seed and covered his short postion at some later date, he would not make any money, nor would he lose any.

So what's the point? In the winter he would process the seed: dry it, clean it, inoculate it (add bacteria). Then he could sell it in the spring at a price higher than the market price, while covering his short position. So he profits by his "value added" to the product while being immune from potentially huge market price fluctuations.

He did not trade in the futuures market at specific dates since he did not know when the "real" seed was going to be sold.

Now, ... what is a hedge fund?? Well yes, most have carte-blanche to be wild speculators and many do just that. But the basic responsible concept is to take positions in the market that are both long and short in an intelligent way. In this way you should make money when the market goes up, but not lose much or any money when the market, as a whole, goes down.

An example: Suppose the hedge fund thinks that there is a hot semiconductor maker of consumer electronics chips. Instead of just buying that stock, the fund will also look for a similar company making similar chips, but one that is a poor company. Then the fund buys the good company and "shorts" the poor company.

If the whole semiconductor industry surges up in market value, or goes down; it doesn't matter. No money gained or lost. If however, the "good" company goes up more than the industry as a whole, &/or the "bad" company goes down more than the industry as a whole; then the fund makes money. The technique is market neutral in the sense that it does not matter if the markets as a whole go up or down.

However, if the fund manager gets the notion of what is a good company or a bad company wrong, the losses can be worse than being in a basic index fund.

Answer 3

Okay hell I could write a book. Sorry this will be long but you have to understand what a Hedge is to understand what a Hedge Fund does. I will use one very small example.

Cows and Corn.

Farmer A sells cattle on the market for meat.
Farmer B sells corn on the market to feed the cows.

Farmer A has no clue what his cattle will be worth in 12 months. Maybe its a great growing season, or maybe mad cow comes out. Maybe there is a boom in overseas meat. This all will determine the price of his cattle in a year. He is running a farm so he sells it now for a future price in a year. He agrees on a price that he will sell his cows for. Maybe he sells it for 2 dollars a lb and the open market when he sales is at 1.50 a lb he made money. But if the open market is at 3 dollars a lb he is stuck at 2 dollars but he is happy because he knows.

Farmer B has 500 acres of corn that is growing. He has the same problem that Farmer A has, maybe he wont get rain, maybe he will get rain. He doesnt know what the price of corn will be in 3 months 6 months or 12 months. So he sells it at a set price in advance. Maybe when its time to sell corn is 5 dollars a pound on the open market, but he sold it at 6. He is happy. But maybe its 8 dollars on the open market and he sold it for 6, he is still happy because he knew what he would make in advance.

Farmer A goes to Farmer B and says I need to set my price for my cows. Farmer B says I need to set my price for my corn. Farmer B says I will sell you this corn in the future at this price. Thats called a Future, or a Future sell. Farmer A accepts the sell and buys the future price. Farmer B now knows exactly what it will cost to feed his Cows so he can set the price of his Cows. The cost of food wont go up and he can set his profits. Regardless of what happens in the market he knows exactly what he will make. This is called a *HEDGE*.

A Hedge fund is speculators. They buy and sell these contracts on the open market. At the end the corn might be selling for 3 dollars but they own the 2 dollars the the farmer offered. The hedge fund makes or loses the difference. They are speculators and they run the markets. The farmer knows what he is making the corn farmer knows what he is selling for, but they dont sell to eachother. The loses or gains that the Farmer A or Farmer B would have seen, are gained or lost by Hedge Funds.

So for example Farmer A sold his meat for 2 dollars a lb on the future market. But its currently selling for 4 dollars a lb. The hedge fund that was trading it made 2 dollars a lb. Now if Farmer B sold his corn 6 dollars a bushel (way high). But its only selling for 2 dollars on the open market the hedge fund just lost 4 dollars a bushel.

The Hedge Fund speculates what the price will be in 6 months to a year. What happens to the corn or the cows doesnt hurt the farmer normally, it hurts the speculators and Hedge Fund investors because they are the ones that bought these deals. They can win and they can lose.

Hedge Funds only bet on the gains or loss. Stock market you own 1000 dollar stock it goes down 1 dollar, your stock is now worth 999 dollars. On a Hedge you hedge for 1000 dollars in hedges in Corn or Oil, and it changes a dollar. You lost maybe 300-400 dollars, or gained that much. The only bet the loss or gain and 1000's of dollars can be gained or lost in a penny change on corn.

Sorry its long but I barely barely scratched the service. If you need more help just ask.

Answer 4

Is a company that get funds from different investors and the main objective is to get assets that will cover them from some kind of risks, it could be foreign exchange hedging or derivatives, or oil, etc.

They are meant to cover from certain risks, credit risks or price speculation or fluctuation risks.

Answer 5

hedge fund uses derivative and other types of investments to achieve high rewards for their clients. Normally it is high risk/ high reward. Only the wealthy are allowed to become clients because of the risk.