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.
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.