Hedge Funds are considered to be “alternative” investment funds that are pools of capital from a fixed or limited number of investors. Hedge funds use a variety of strategies to create “active return” for their investors. Investors in hedge funds will have significant asset, and make large initial investments. The hedge funds themselves are pools of securities that invest in a variety of types of securities.
Where did the name “Hedge Fund” come from?
The first “hedge” fund was created in the 1940s. It was an equity vehicle that was using the long/short investment strategy. (This means that a long position is taken in stocks that are supposed to appreciate and a short position is taken in stocks that are expected to decline.) The term “hedging” is the practice of reducing risk. While most hedge funds invest in what would be considered “riskier” investments, their overarching goal is always to maximize return on investment.
Are Hedge Funds like Mutual Funds?
Hedge Funds are often likened to mutual funds, as they are both pools of securities that can invest in multiple securities, but there are actually two major differences between the two:
- Unlike mutual funds, hedge funds are not (currently) regulated by the United States Securities and Exchange Commission.
- Hedge Funds’ leverage is not capped out by regulators like mutual funds are and their investments are usually in assets that are more liquid.
- Hedge funds have a larger investment range than mutual funds do. Hedge funds typically do not invest in what are considered “traditional securities” like stocks and bonds. Hedges usually involve a more sophisticated portfolio of techniques and investments.
How Does Hedge Fund Investing Work?
In very simple terms, hedge funds use specific investment strategies (often called “styles”) to take advantage of opportunities that present themselves within the market.
As mentioned earlier, hedge funds cater to a very specific set of investors. In order to be involved in a hedge fund, the investor must have a net worth of more than one million dollars, and earn a minimum amount of money on an annual basis. The hedge itself is managed by a firm that collects both an incentive fee and an assets under management fee.
Melissa Ko is the Managing Member of Covepoint Capital Advisors, LLC and serves as the Chief Investment Officer of its flagship, the Covepoint Emerging Markets Macro Fund. Please visit https://about.me/melissako, https://melissakoblog.wordpress.com/, http://melissakocovepoint.tumblr.com/, and http://www.slideshare.net/MelissaKo1 to learn more!