Hedge funds are funds where investors pool together their money.👨👩👧👦 This money is then invested by the Hedge fund into a wide variety of things including securities. At the end of the agreed investment term, investors are returned their money plus any capital returns made. Investors can also choose to reinvest their funds with the hedge fund although the terms such as fees etc may have changed.
To hedge means to reduce risks and hedge funds tend to invest in a more aggressive way than other funds and hence reducing risk is a big factor. Hedge funds are expected to beat the returns of mutual funds dude to the more aggressive nature of their investment strategies.
In principal, hedge funds are like Mutual funds but they have some really big differences.
Mutual funds vs Hedge Funds
Hedge Funds are not regulated:✔
Yes and no, Hedge funds are regulated but their regulation is quite limited and in so many ways many people consider them unregulated by any financial regulatory body and this means they cant market or advertise to gain new investors. You will have to search them out and then approach them if you want to have your money invested with a hedge fund.
Hedge funds are not limited in their investment strategy:✔
Hedge funds can invest in whatever way they see fit, they can invest long term, short term, invest in derivatives or even use huge amounts of leverage( borrowing money to increase their investment capital and hence returns) when investing.
Hedge fund can buy any assets:✔
Because Hedge funds are unregulated they can buy whatever they like such as fine art, land or cars. They don't just invest in stocks, bonds or equities.
Hedge funds can charge any fees they feel:✔
Typically hedge funds charge a 2% fee for funds under management and then 20% on any profits made at the end of the year. Some hedge fund managers take more than the standard 20% on profits and even go as far up ast 35%. This is how the hedge fund managers are incentivised to make enough money and beat the markets, hence beat the performance of the most notable index fund in the economy.
Hedge funds can manage funds in whatever way:✔
Hedge funds typically lock the funds away during the investment period which may be from 1 year to 5 years. This means investors cannot get their money back during this period.
Hedge funds are only open to accredited investors:✔
This means to invest with a hedge fund you will need to have a good understanding of how they work and have experience of investing due to the high risk nature of hedge funds. You will likely also need to have a minimum amount in assets and invested capital. Hedge funds typically have very high minimum investment amounts which put the out of reach to most everyday investors.