What are Hedge Funds? Who Manages Them?
Who Invests in Them?

A hedge fund is a private investment fund that aims to achieve high returns through high-risk investment strategies. As the name implies, hedge funds often look to minimize the potential losses associated with these high-risk strategies through a variety of hedging methods, including short selling. The funds are most often open to a limited number of investors and require large minimum investments. These investments are illiquid as there is usually a minimum timeframe associated with hedge fund investing.

How It’s Set Up

A Hedge Fund might also be described as an investment portfolio operating under a Limited Partnership structure. The Fund Manager will generally have extensive portfolio management and sophisticated trading skills. Unlike mutual funds, the compensation for the hedge fund manager is generally performance-based. The investors (limited partners) agree to function as silent partners.

In addition to high-net worth individuals, hedge fund investors include Swiss private banks, insurance companies, pension funds, and other domestic and international entities.

Most hedge funds are structured as open-end funds and, accordingly, will issue new shares to investors on an ongoing basis. As with any open-ended fund, investors can redeem shares to the fund at the current net asset value (NAV). This is, of course, subject to the fund’s stated redemption policies.

Investment Positions

Hedge funds are legally permitted to undertake a wider range of activities than other investment funds and each fund outlines its own strategy of investment instruments and methods that often include equity positions, debt instruments, commodities, options, futures, and more. Many hedge funds are able to leverage significant lines of credit, enabling the fund managers to take large enough positions to profit from small arbitrage opportunities. Of course, a move in a direction other than what was anticipated can leave the fund exposed.

Hedge Fund Growth

Since its inception in 1949, the hedge fund industry has grown considerably, especially in recent years. In 1990, there were about 600 hedge funds worldwide with assets of approximately $38 billion. Today, there are several thousand hedge funds with total assets estimated at almost $3 trillion.

Hedge Funds v. Mutual Funds

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The above information is educational and should not be interpreted as financial advice. For advice that is specific to your circumstances, you should consult a financial or tax advisor.

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