What is a hedge fund?
Hedge funds are collective investment vehicles typically restricted to experienced investors and pursuing unconventional investment strategies, sometimes with borrowed money. The name derives from the fact that the original funds 'hedged' their positions to reduce risk, but modern funds do not necessarily do this.
Where have you heard about hedge funds?
Hedge funds made big news in the financial crisis, when some blamed their secrecy and lack of regulation for having made matters worse. More recently, mainstream investment managers have sometimes offered retail clients hedge-fund type strategies designed to deliver market-beating returns.
What you need to know about hedge funds...
There is probably as much mystique surrounding hedge funds today as there was a generation ago around Swiss private banks and a lot of it will be similarly misleading. The name is a misnomer. Modern hedge funds do not necessarily hedge their investments, indeed some pursue what would be considered a high-risk approach by mainstream asset managers.
A number of features define a hedge fund:
- It will be private, open only to a limited number of wealthy and experienced investors
- The fees charged by those running the fund will be high by outside standards
- The fund will seek market-beating returns from unconventional investment strategies
- As a professionals-only fund, it will be more lightly regulated