A hedge fund (HF) is a type of alternative investment that seeks to generate high returns by investing in a pool of underlying securities. In other words, it’s a group of investors' funds pooled together to purchase investments.
Explanation :
Hedge funds implement a range of different strategies, including long and short positions to leverage (hedge) investment risk and capitalize on investment opportunities. By opening a long position, a HF is buying stocks, whereas by opening a short position, the HF is borrowing the underlying asset, and it sells the stocks to buy them later at a lower price. Hedge fund strategies are classified based on what they seek to achieve and on the investment profile of the investor. Although currently not regulated by the U.S. Securities And Exchange Commission, they may invest in securities, bonds, derivatives, and real estate assets, offering geographical diversification as well as exposure to the domestic markets.
In a nutshell :
- Hedge funds are actively managed alternative investments that typically use non-traditional and risky investment strategies or asset classes.
- Hedge funds charge much higher fees than conventional investment funds and require high minimum deposits.
- The number of hedge funds has been growing by approximately 2.5% over the past five years but they remain controversial.
- Hedge funds were celebrated for their market-beating performances in the 1990s and early 2000s, but many have underperformed since the financial crisis of 2007-2008, especially after fees and taxes are factored in.
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