Hedge Funds

Hedge funds use aggressive investment strategies including short, long, leveraged, and derivatives to try generating high returns.  Hedge funds are open to a limited number of investors and usually require a high initial investment.  Hedge funds are similar to mutual funds in that professional managers are in charge of a pool of money.  However, hedge funds are usually for wealthier investors and their strategies tend to vary more than hedge funds.  Also, hedge funds have in the past, tended to be unregulated.  This situation may change with financial reform enacted after the 2008 financial crisis.  Most hedge funds require investors to keep their money in the fund for at least one year.  Traditionally the term “hedge” is usually defined as reducing risk, which is how hedge funds started.  Today, the goal of hedge funds is to produce the most return on investment instead of just protecting against a bear market.

The distinctiveness of hedge funds derive from their fee structure, sometimes known as 2 and 20.  Generally, hedge funds charge a 2% management fee (based of total assets managed) and a 20% performance fee (based off the performance of the fund for the year).