Defining Hedge Funds
Hedge funds are investment funds that are open to a limited number of investors, permitted by regulators that take on wider range investment and trading activities than other investment funds.
Generally hedge funds pay a performance fee to investment managers. Every hedge fund will have its own investment strategy which determines the types of investments and the methods of the investments. Hedge funds invest in broad ranges of investments that include debts, commodities and shares.
Hedge funds “hedge” some of the risks in their investments using short selling and derivatives. Hedge funds have also been known to be applied to certain funds that do not “hedge” their investments. Funds that use short selling increase risk, rather than decrease risk, with the exception of increasing returns on investments.
Professional or wealthy investors are usually the only ones that are open to hedge funds, providing them with exemptions in many jurisdictions from regulations that can include short selling, derivatives, leverage, fee structures and the liquidity of interests in the funds. Performance fees and the fund’s open ended structure is what sets hedge funds apart from ordinary investment funds.
Hedge funds can run into many billions of dollars. The gross assets of hedge funds will normally be higher yet due to leverage. Certain specialty markets are dominated by hedge funds.