Hedge Fund
An aggressively managed portfolio of investments that uses advanced investment
strategies such as leverage, long, short and derivative positions in both
domestic and international markets with the goal of generating high returns
(either in an absolute sense, or over a specified market benchmark).
Legally, hedge funds are most often set up as private investment partnerships
that are open to a limited number of investors and require a very large initial
minimum investment. Investments in hedge funds are illiquid as they often
require investors keep their money in the fund for a minimum period of at least
one year.
Investopedia Commentary
For the most part, hedge funds (unlike mutual funds) are unregulated because
they cater to sophisticated investors. In the U.S., laws require that the
majority of investors in the fund be accredited. That is, they must earn a
minimum amount of money annually and have a net worth of over $1 million, along
with a significant amount of investment knowledge. You can think of hedge funds
as mutual funds for the super-rich. They are similar to mutual funds in that
investments are pooled and professionally managed, but differ in that the fund
has far more flexibility in its investment strategies.
It is important to note that hedging is actually the practice of attempting to
reduce risk, but the goal of most hedge funds is to maximize return on
investment. The name is mostly historical, as the first hedge funds tried to
hedge against the downside risk of a bear market with their ability to short the
market (mutual funds generally can't enter into short positions as one of their
primary goals). Nowadays, hedge funds use dozens of different strategies, so it
isn't accurate to say that hedge funds just "hedge risk". In fact, because hedge
fund managers make speculative investments, these funds can carry more risk than
the overall market.*
* Source
APA:hedge fund. (n.d.). Wall Street Words. Retrieved
November 17, 2006, from Dictionary. COM website:
http://dictionary.reference.com/browse/hedge fund
Chicago Style:hedge fund. Dictionary. COM. Wall Street
Words, Houghton Mifflin Company.
http://dictionary.reference.com/browse/hedge fund (accessed: November 17,
2006
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