What is a Hedge Fund?

Published by Thomas Herold in Corporate Finance, Economics, Investments, Trading

'Hedge Fund' is explained in detail and with examples in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

A hedge fund is an investment fund which are commonly only open to a specific group of investors. These investors pay a large performance fee each year, commonly a certain percent of their funds under management, to the manager of the hedge fund. Hedge funds are very minimally regulated and are therefore are able to participate in a wide array of investments and investment strategies.

Literally every single hedge fund pursues its own strategy of investing that will establish the kinds of investments that it seeks. Hedge funds commonly go for a wide range of investments in which they may buy or sell short shares and positions. Stocks, commodities, and bonds are some of these asset classes with which they work.

As you would anticipate from the name, hedge funds typically try to offset some of the risks in their portfolios by employing a number of risk hedging strategies. These mostly revolve around the use of derivatives, or financial instruments with values that depend on anticipated price movements in the future of an asset to which they are linked, as well as short selling investments.

Most countries only allow certain types of wealthy and professional investors to open a hedge fund account. Regulators may not heavily oversee the activities of hedge funds, but they do govern who is allowed to participate. As a result, traditional investment funds’ rules and regulations mostly do not apply to hedge funds.

Actual net asset values of hedge funds often tally into the many billions of dollars. The funds’ gross assets held commonly prove to be massively higher as a result of their using leverage on their money invested. In particular niche markets like distressed debt, high yield ratings, and derivatives trading, hedge funds are the dominant players.

Investors get involved in hedge funds in search of higher than normal market returns. When times are good, many hedge funds yield even twenty percent annual investment returns. The nature of their hedging strategies is supposed to protect them from terrible losses, such as were seen in the financial crisis from 2007-2010.

The hedge fund industry is opaque and difficult to measure accurately. This is partially as a result of the significant expansion of the industry, as well as an inconsistent definition of what makes a hedge fund. Prior to the peak of hedge funds in the summer of 2008, it is believed that hedge funds might have overseen as much as two and a half trillion dollars. The credit crunch hit many hedge funds particularly hard, and their assets under management have declined sharply as a result of both losses, as well as requests for withdrawals by investors. In 2010, it is believed that hedge funds once again represent in excess of two trillion dollars in assets under management.

The largest hedge funds in the world are JP Morgan Chase, with over $53 billion under management; Bridgewater Associates, having more than $43 billion in assets under management; Paulson and Company, with more than $32 billion in assets; Brevan Howard that has greater than $27 billion in assets; and Soros Fund Management, which boasts around $27 billion in assets under management.

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The term 'Hedge Fund' is included in the Economics edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.