What Is A Hegde Fund?
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A hedge fund is a private investment fund typically open to only a limited number of investors. Hedge Funds have grown in size and influence on the public securities and private investment markets. Hedge Funds are not currently subject to any direct regulation, unlike mutual funds, pension funds and insurance companies, which makes hedge funds rather risky!
Hedge funds are limited only by the terms of the contracts governing the particular fund. Hedge funds may be either long or short assets and may enter into futures, swaps and other derivative contracts. In this way, hedge funds are able to follow more complex investment strategies intended to profit from market volatility or from falling markets.
Hedge fund managers receive a significant portion of their compensation from incentive fees tied to the fund's performance, typically around 20% of annual gains plus a management fee equal to about 1% of the assets. The funds, often organized as limited partnerships, typically invest on behalf of high-net-worth individuals and institutions. Their primary objective is often to preserve investors' capital by taking positions whose returns are not closely correlated to those of the broader financial markets.
Because of the substantial risks involved in unregulated, complex and leveraged investments, hedge funds are normally open only to professionals or institutionals. This restriction is often implemented through limits on investor numbers or minimum investment amounts.
Ricky Schmidt
January 24, 2007
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