One of my readers asked to explain the workings of a hedge fund. Hedge funds can take on several forms, but primarily they are a pool of various types of investments that are run through a limited partnership comprised of seasoned investors. Hedge funds can invest in many different strategies and the mix can be positions in equities (long and/or short), real estate, currencies, futures, options and derivatives, etc. that are aggressively managed to provide high returns. The term “hedge” refers to the fund’s intentions to use various offsetting strategies during up and down markets. The funds tend to be very illiquid and the players are usually in it for the long-haul. Hedge funds are not as regulated by the SEC, as are traditional funds, and are very speculative with wide swings in value. The requirements to invest in such funds are strict and are based on an individual’s income, market savvy and net worth and usually require a large initial contribution. Again, depending on the objectives of the fund, they can literally invest in anything at the discretion of the managers. Many funds are also highly leveraged and borrow money to amplify returns. Fees vary, but usually consist of a fixed management fee and a cut of the profits and, of course, investors also “participate” in the loss and may not receive any returns in down years. While there have been some notable successes for hedge funds over the years, there has been its share of total failures, too.
I hope this helps.