Hedge Fund

A hedge fund is a pooled investment fund that uses a range of strategies to generate returns for its investors. Unlike mutual funds, hedge funds are lightly regulated, available only to accredited or institutional investors, and typically charge higher fees. They're called hedge funds because they originally aimed to "hedge" or reduce market risk, though many now pursue aggressive strategies. Hedge funds employ diverse strategies. Long/short equity funds buy stocks they expect to rise while shorting those expected to fall. Global macro funds bet on economic trends across countries and asset classes. Event-driven funds trade around corporate events like mergers and bankruptcies. Quantitative funds use mathematical models to identify trading opportunities. The fee structure is distinctive. The traditional model is "2 and 20" - a 2% annual management fee plus 20% of profits. While fees have compressed somewhat in recent years, hedge funds remain expensive compared to mutual funds and ETFs. These high fees are justified only if the fund generates returns that sufficiently exceed what's available from cheaper alternatives. Hedge fund performance varies widely. Some have generated extraordinary returns, but studies suggest that as a group, hedge funds have underperformed simple index strategies over many periods, especially after fees. The dispersion of results - the difference between the best and worst funds - is enormous, making fund selection crucial. Access to hedge funds typically requires being an accredited investor (meeting income or net worth thresholds) and meeting substantial minimum investments, often $1 million or more. This exclusivity means most individual investors cannot invest directly in hedge funds. For those with access, hedge funds can offer diversification benefits because their returns may be less correlated with traditional stocks and bonds. However, they also come with risks including leverage, illiquidity, opacity, and the potential for catastrophic losses. Due diligence is essential before investing in any hedge fund.