Hedge fund

A hedge fund is an investment fund that pools capital from accredited individuals or institutional investors and invests in a variety of assets, often with complex portfolio-construction and risk-management techniques.[1] It is administered by a professional investment management firm, and often structured as a limited partnership, limited liability company, or similar vehicle.[2][3] Hedge funds are generally distinct from mutual funds, as their use of leverage is not capped by regulators, and distinct from private equity funds, as the majority of hedge funds invest in relatively liquid assets.[4][5]

The term "hedge fund" originated from the paired long and short positions that the first of these funds used to hedge market risk. Over time, the types and nature of the hedging concepts expanded, as did the different types of investment vehicles. Today, hedge funds engage in a diverse range of markets and strategies and employ a wide variety of financial instruments and risk management techniques.[3]

Hedge funds are made available only to certain sophisticated or accredited investors and cannot be offered or sold to the general public.[1] As such, they generally avoid direct regulatory oversight, bypass licensing requirements applicable to investment companies, and operate with greater flexibility than mutual funds and other investment funds.[6] However, following the financial crisis of 2007–2008, regulations were passed in the United States and Europe with intentions to increase government oversight of hedge funds and eliminate certain regulatory gaps.[7]

Hedge funds have existed for many decades and have become increasingly popular. They have now grown to be a substantial fraction of asset management,[8] with assets totaling around $3.235 trillion in 2018.[9]

Hedge funds are almost always open-ended and allow additions or withdrawals by their investors (generally on a monthly or quarterly basis).[1] The value of an investor's holding is directly related to the fund net asset value.

Many hedge fund investment strategies aim to achieve a positive return on investment regardless of whether markets are rising or falling ("absolute return"). Hedge fund managers often invest money of their own in the fund they manage.[10][11] A hedge fund typically pays its investment manager an annual management fee (for example 2% of the assets of the fund), and a performance fee (for example 20% of the increase in the fund's net asset value during the year).[1] Both co-investment and performance fees serve to align the interests of managers with those of the investors in the fund. Some hedge funds have several billion dollars of assets under management (AUM).

  1. ^ a b c d Cite error: The named reference Lins was invoked but never defined (see the help page).
  2. ^ Stuart A. McCrary (2002). "Chapter 1: Introduction to Hedge Funds". How to Create and Manage a Hedge Fund: A Professional's Guide. John Wiley & Sons. pp. 7–8. ISBN 047122488X.
  3. ^ a b The President's Working Group on Financial Markets (April 1999). "Hedge Funds, Leverage, and the Lessons of Long-Term Capital Management" (PDF). U.S. Department of the Treasury.
  4. ^ "Alternative Funds Are Not Your Typical Mutual Funds". finra.org. Financial Industry Regulatory Authority. 11 June 2013. Retrieved 16 April 2014.
  5. ^ David Stowell (2012). Investment Banks, Hedge Funds, and Private Equity. Academic Press. p. 237. ISBN 9780124046320. Retrieved 18 April 2014.
  6. ^ François-Serge Lhabitant (2007). Handbook of Hedge Funds. John Wiley & Sons. ISBN 0470026634.
  7. ^ Ismail, Netty (21 February 2011). "Institutions Damp Hedge Fund 'Startup Spirit,' Citi's Roe Says". Bloomberg Businessweek. Archived from the original on 25 February 2011. Retrieved 9 January 2015.
  8. ^ Lemke, Lins, Hoenig & Rube, Hedge Funds and Other Private Funds: Regulation and Compliance (Thomson West, 2014 ed.)
  9. ^ "HEDGE FUND ASSETS ECLIPSE RECORD LEVEL FOR EIGHTH CONSECUTIVE QUARTER DESPITE MIXED CAPITAL FLOWS | Hedge Fund Research®". www.hedgefundresearch.com. Retrieved 2018-11-22.
  10. ^ Anson, Mark J.P. (2006). The Handbook of Alternative Assets. John Wiley & Sons. p. 123. ISBN 0-471-98020-X.
  11. ^ Nocera, Joe (16 May 2009). "Hedge Fund Manager's Farewell". The New York Times. Retrieved 16 March 2011.

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