What is a hedge fund?

What is a hedge fund?

Hedge funds are private investment groups that attract high net worth individuals (and in some cases institutions), and use investment strategies that may be riskier than would be suitable for the average investor. While the name "hedge" implies that the fund serves a defensive purpose, today’s hedge funds use wide array strategies, and more often than not the goal is total return.

The strategies used are often speculative, contrarian, or alternative compared to most investment options in say mutual funds or traditional long-only asset managers.

Hedge fund managers often represent the most nimble and forward-thinking money managers to be found, and their shareholders generally give them more room to take risks and move freely than other money managers involved in mutual funds and institutional investments.

Today, some ETFs and entry-level investments seek to follow hedge fund strategies but to participate in a true hedge fund, there is still a vetting process that investors must pass. The person must meet the SEC definition of an Accredited Investor, and be able to meet the large minimum investment requirement of the fund (typically $1 million minimum).

The investment may not be available to them for a year or more, which is known as the lock-up period, and even when withdrawals are allowed they must generally be made on a rigid schedule at long intervals, making hedge funds highly illiquid assets in many cases.

An investor in a hedge fund must be able to withstand a greater degree of risk (to a larger amount of money) than the average investor. While hedge funds offer the higher risk/higher potential return approach, they do not always outperform indexes or traditional asset managers.