Hedge fund

A hedge fund is an investment fund that can utilize a number of strategies to get a return on invested capital.

A hedge fund can invest in many markets such as currency market, commodity market, stock market, bond market. A hedge fund can trade using a number of financial instruments such as stocks, futures contracts, options currencies and bonds. A hedge fund can also trade using leverage.

The term hedge fund is popular among fund managers and many funds call themselves hedge funds without actually being a hedge fund. For example if it is just a long stock market fund with leverage it may be tempting for the fund manager to call it a hedge fund.

Fees of hedge funds are usually larger than other funds. The fee structure of hedge funds usually include a performance fee. This fee structure is known as “Two and Twenty”—a 2% asset management fee and then a 20% cut of any gains generated. These bigger fees are most likely a reason why fund managers wants to call themselves a hedge fund.

The term hedge fund implies the use of hedged positions. And that the risk is limited. For example going long an undervalued asset and going short an over valued asset.

Hedge funds are usually only accessible to accredited investors and thus the hedge funds require less SEC regulations than other funds. There are usually a required minimum investments to be able to invest in a hedge fund. This amount is usually quite large sum for a small time investor. There is often also a minimum of 1 year lock-up period that the investor can not withdraw money from the fund.