Hedge funds are pooled investment funds that trade in relatively liquid assets and use more complex trading, portfolio-construction, and risk management techniques to improve performance. They are considered alternative investments and are distinct from regulated investment funds available to the retail market, such as mutual funds and ETFs. Hedge funds are actively managed by professional fund managers who use a wide range of strategies, including leveraging, short-selling, and other speculative investment practices that are not often used by mutual funds. Hedge funds aim for the greatest possible returns and take the greatest risks while trying to achieve them.
Some key features of hedge funds include:
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Investment strategies: Hedge fund strategies cover a broad range of risk tolerance and investment philosophies using a large selection of investments, including debt and equity securities, commodities, currencies, derivatives, and real estate.
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Regulation: Hedge funds are not as strictly regulated by the Securities and Exchange Commission (SEC) as mutual funds are.
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Investment structure: Hedge funds are most often structured as an offshore corporation, limited partnership, or limited liability company. They are managed by an investment manager who is legally and financially distinct from the hedge fund and its portfolio of assets.
Hedge funds pool money from investors and invest in securities or other types of investments with the goal of getting positive returns. They are restricted to large-scale investors, such as high-net-worth individuals and institutional investors. Currently, there are about 8,500 hedge funds operating worldwide, managing over $1 trillion in assets.
