A hedge fund is a limited partnership of private investors whose money is managed by professional fund managers who invest in risky or non-traditional assets to earn above-average investment returns
. Hedge funds are typically considered a risky alternative investment choice and are usually targeted towards wealthy clients
. Some key characteristics of hedge funds include:
- Active management : Hedge funds are actively managed by professional managers who buy and sell certain investments with or some sector or index of the markets, aiming for the greatest possible returns and taking the greatest risks
- Leverage : Hedge funds often use leverage, which involves borrowing money to increase investment exposure and risk
- Flexible strategies : Hedge funds have more flexible investment strategies than conventional investment funds, such as mutual funds, and may use short-selling and other speculative investment practices
- Accredited investors : Hedge funds require a high minimum investment or net worth from accredited investors, who are typically wealthy individuals or institutional investors like pension funds and insurance companies
- Higher fees : Hedge funds charge higher fees than conventional investment funds, often including an asset management fee of 1-2% of assets and a performance fee of 20% of the hedge fund's profit
- Less regulation : Hedge funds are not as highly regulated or scrutinized as mutual or exchange-traded funds, which means they have more freedom to invest in riskier assets and strategies
If you are considering investing in a hedge fund, it is essential to understand the level of risk involved, the fund's investment strategies, and any limitations on your right to redeem your shares
. You should also be aware of the fees associated with hedge funds, as they can impact your return on investment
