A hedge fund is a type of pooled investment fund that trades in relatively liquid assets and is able to make extensive use of more complex trading, portfolio-construction, and risk management techniques in an attempt to improve performance. Hedge funds are actively managed alternative investments that commonly use risky investment strategies, such as short selling, leverage, and derivatives, to earn above-average investment returns. They are considered alternative investments because their ability to use leverage and more complex investment techniques distinguishes them from regulated investment funds available to the retail market, commonly known as mutual funds and ETFs. Hedge funds are usually open-ended, which means they typically allow investors to invest and withdraw capital periodically based on the funds net asset value.
Some key features of hedge funds include:
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Investors: Hedge funds pool money from investors, typically institutional investors, high net worth individuals, and accredited investors.
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Strategies: Hedge fund managers use a wide range of strategies, including leveraging or trading of non-traditional assets, to earn above-average investment returns. Common hedge fund strategies depend on the fund manager and include equity, fixed-income, and event-driven goals.
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Fees: Hedge funds charge higher fees than conventional investment funds.
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Regulations: Hedge funds are not subject to some of the regulations that apply to mutual funds, such as limits on leverage and requirements to provide liquidity.
To invest in a hedge fund, you generally must be an accredited investor, which means having a minimum level of income or assets. Hedge funds are often considered a risky alternative investment choice and usually require a high minimum investment or net worth, often targeting wealthy clients.
