What is a hedge fund?
A hedge fund is a firm that operates a pooled investment vehicle, often employing a wide range of strategies to generate potential returns for investors. Unlike mutual funds, which are typically limited to long-only positions in stocks and bonds, hedge funds can engage in a variety of strategies—from short selling to derivatives and alternative investments. Hedge fund investments are often considered risky.
Hedge funds have a general partner (GP) who manages them. The GP makes all the investment decisions and handles the day-to-day operations of the fund. They also have limited partners (LPs), which are the investors who provide the capital. LPs can include, but are not limited to, institutional investors like pension funds, endowments, insurance companies, and high-net-worth individuals, as well as accredited investors. LPs don’t participate in the daily management of the fund, but they do benefit from the returns generated by it.
Hedge funds employ a variety of investment strategies, from equity strategies like long and short positions to focusing on global macro trends. GPs aim to manage risk by diversifying investments across various assets to reduce exposure to any single position, as well as by using derivatives and other instruments to provide hedging. In modern times, hedge funds have become known for high volume, algorithm-driven investment strategies that can quickly deploy hundreds of millions and even billions in capital to take advantage of market inefficiencies like global price discrepancies on a given asset, for example.
In the United States, hedge funds are primarily regulated under the Investment Advisers Act of 1940. They are generally only available to accredited investors and tend to charge high fees (usually around 2% of assets under management).
