What Are Hedge Funds

Hedge funds are investment partnerships that allow investors to pool their money together and invest it in a wider variety of financial products than traditional mutual funds. The first hedge fund was created in 1949 by Alfred Winslow Jones, who used innovative strategies such as short selling and leverage to minimize risk.

Hedge funds are known for their aggressive and risky investment strategies, and they are generally only accessible to accredited investors who meet certain net worth requirements. These funds have a wide latitude in terms of investment options and often employ leverage to amplify returns. They also charge both an expense ratio and a performance fee, commonly known as the “two and twenty” fee structure.

Hedge funds can pursue various strategies, such as long/short equity, equity market neutral, merger arbitrage, and global macro. Notable hedge funds include Renaissance Technologies and Pershing Square.

Hedge funds face less regulation compared to other investment vehicles, as they mainly cater to accredited investors. However, the industry has experienced regulatory changes in recent years, such as the lifting of the ban on hedge fund advertising. Hedge funds offer benefits such as the ability to generate positive returns in both rising and falling markets and the opportunity to customize investment strategies. However, they also come with risks, including potential losses, limited liquidity, and the use of leverage.

Overall, hedge funds provide a unique investment option for wealthy individuals but are not without their drawbacks.

References:

• Investopedia – Hedge Funds
• Investor.gov – Hedge Funds
• Sec.gov – Hedge Funds (PDF)
• TheStreet – Hedge Fund
• PitchBook – Hedge Funds 101
• IRS – Hedge Funds (PDF)
• BlackRock – What are Alternative Investments?
• FINRA – Liquid Alts are not your Typical Mutual Funds
• Evelyn – What Are the Main Types of Hedge Funds?