What are Hedge Funds?
Hedge funds are managed alternative investments that employ non-traditional strategies.
The fundamental structure of a hedge fund is a partnership or investment pool in which a fund manager invests across different equities and securities that are aligned with the goals of the funds.
Some hedge funds specialize in a specific type of investment, for example, stocks, patents, real estate, bonds and private equity.
Hedge Funds vs Mutual Funds
Although similar to mutual funds in many ways, hedge funds operate with a few key differences.
Hedge funds are able to invest in a broader range of securities, including both long and short equity positions, derivatives like swaps, options, and futures, higher financial leverages, and more. Hedge funds are usually accessible to affluent investors, or accredited investors.
Key Characteristics of Hedge Funds
- Typically only available to accredited or institutional investors
- Often employ leverage and derivatives to enhance returns
- Use various strategies including long/short positions, global macro, event-driven, and quantitative approaches
- Usually have higher fee structures (commonly "2 and 20" - 2% management fee and 20% performance fee)
- Less regulated than mutual funds and other traditional investments
- Often have lock-up periods restricting when investors can withdraw funds
Common Hedge Fund Strategies
Long/Short Equity
Taking long positions in stocks expected to increase in value and short positions in stocks expected to decrease in value.
Market Neutral
Seeking to avoid market risk by taking offsetting long and short positions of equal size within the same sector.
Event-Driven
Focusing on opportunities created by significant corporate events such as mergers and acquisitions, bankruptcies, or reorganizations.
Global Macro
Making investments based on large-scale economic and political views, often involving positions in interest rates, currencies, commodities, or indices.