Hedge Funds

What is a Hedge Fund?

A Hedge Fund is a managed portfolio of investments that often employs advanced investment strategies.  Unlike long-only Mutual Funds, which can only buy securities, Hedge Funds can buy and sell short.  If a Mutual Fund manager believes a stock's price will decrease, his only actionable option is to not buy that stock.  A Hedge Fund manager, on the other hand, can borrow shares of that stock, sell them short, and make money as the stock declines just as one would profit from the increase in share price of a stock he owns.  Hedge Funds are also notorious for their use of derivatives, financial instruments such as options, futures, and swaps, whose value is contingent on that of an underlying security or commodity.  Derivatives afford the manager leverage and are often responsible for the potential outsized risk and returns delivered by Hedge Fund managers.  Hedge Fund strategies include, but are not limited to: equity market neutral, convertible arbitrage, fixed-income arbitrage, distressed securities, merger arbitrage, hedged equity, global macro, emerging markets and fund of funds. 

Hedge Funds are significantly less regulated than Mutual Funds.  In the United States, all investors in a Hedge Fund must be accredited in that their net worth exceeds $1 million and they possess considerable investment experience.