A hedge fund is a private pool of capital actively managed by an investment adviser. Hedge funds are only open for investment to a limited number of accredited or qualified investors who meet criteria set by regulators. These investors can be institutions, such as pension funds, university endowments and foundations, or high net worth individuals. Hedge funds are distinct from mutual funds, individual retirement and investment accounts, and other types of traditional investment portfolios because they can undertake a wider range of investment and trading activities, and invest in a broader range of assets.
Investors in hedge funds typically pay a management fee that goes toward the operational costs of the fund, and a performance fee when the fund’s net asset value is higher than that of the previous year.
Usually defined as “Accredited Investors”, various institutions, corporate treasuries, endowments, fund of funds, family offices, private banks and pensions invest in hedge funds.
The elements contributing to a hedge fund strategy include: the hedge fund’s approach to the market; the particular instrument used; the market sector the fund specializes in (e.g. technology, oil & gas, etc.); the method used to select investments; and the amount of diversification within the fund. There are a variety of market approaches to different asset classes, including equity, fixed income, commodity and currency.
The primary investors are wealthy individuals and institutions. They typically have a great deal of funds to invest, and can weather significant downturns in their portfolio in their quest for higher returns. Many of these investors are trying to outperform the market to recover losses incurred during the stock market crash of 2000.
To “hedge” means to manage risk. Any given money manager may make an allocation/investment that could be described as speculative; if this same manager simultaneously makes an allocation to an allocation/investment specifically designed to balance or counter-act any negative performance from his speculative position then this would be his hedging position. There are many types of perceivable risk – Market, Interest rate, Inflation, Sectoral, Regional, Currency, etc. Hedge fund managers utilize the complete arsenal of financial weapons (holding cash, short selling, buying selling or swapping options, futures, commodity and/or currency futures, etc.) and are expert in concocting hedging positions for most conceivable risks.
A more detailed explanation and review of Hedge Funds can be found at: http://www.eurekahedge.com/