What is a Hedge Fund?

by Catherine Rein
(last updated April 6, 2009)

Hedge funds have gained a lot of publicity in the last few years. In 2006-2007 it was for their amazing investment returns and in 2008 it was for their incredible losses. Hedge funds vary widely in their investment goals and methods. They are primarily for wealthy investors and institutions with significant capital to invest hoping to reduce risk and achieve higher than average returns. They are by law restricted to 100 investors per fund and therefore often set extremely high minimum investment amounts, some as high as $1 million.

Hedge funds use a number of different strategies and invest in many different markets. Because of the unique strategies used, investors are often required to keep their money in the fund for a year or more. The difficulty in getting money back out of a hedge fund makes it very important to research and ask lots of questions before getting in. Investors in hedge funds follow these guidelines before investing:

  • They understand the risks. Not all hedge funds register with the SEC, meaning there is very little oversight of these investments. Also, hedge fund investors do not have all the same state and federal protection available to other investors. Hedge funds are not required to provide regular pricing or valuation information and they often include complex tax structures. This can delay getting tax statement distributions, meaning you might have to file a tax extension.
  • They ask questions. Any time you are trusting your money with someone else you have the right to know how the money will be managed, how it will be invested, who is managing the investment and how you can get your money back.
  • They research the fund managers. Knowing everything about the fund managers will reduce the risk of investing in a hedge fund. Make sure they are qualified to manage your money and find out if they have any judgments against them.

Certainly hedge funds are not for the average investor. The minimum investment amount limits them to only the wealthiest of individuals and institutions. Though they are designed by definition to limit risk (or hedge) their investments, many often require high performance fees and some use highly risky investment strategies. These strategies include short selling (selling a security you do not own), arbitrage (simultaneous buying and selling of securities in different markets), investing in derivatives such as options or futures contracts and investing in volatile international markets.

Author Bio

Catherine Rein

MORE FROM CATHERINE

Insuring Your Home

There are three main components to home insurance: the cost to replace the dwelling, the cost to replace your possessions, ...

Discover More

Signs of Adult ADD

Attention Deficit Disorder (ADD) is a disorder that not only affects children, but adults as well. Many of the children with ...

Discover More

Signs of Juvenile ADHD

Attention Deficit Hyperactivity Disorder (ADHD) is a common mental disorder that affects children and the symptoms of ...

Discover More
More Money Tips

Tax-Free Investing

Who wouldn't want to not pay taxes on the investments they make? It's actually possible and not that hard to do!

Discover More

Successful Long-Term Investing

Investing for long term success is a skill that needs to be honed and constantly tweaked. You can be successful, but need to ...

Discover More

Rolling Over Your IRA

You should roll over old IRA and 401(k) accounts into new IRA accounts. This will increase the amount of control you have ...

Discover More
Comments

If you would like to add an image to your comment (not an avatar, but an image to help in making the point of your comment), include the characters [{fig}] in your comment text. You’ll be prompted to upload your image when you submit the comment. Images larger than 600px wide or 1000px tall will be reduced. Up to three images may be included in a comment. All images are subject to review. Commenting privileges may be curtailed if inappropriate images are posted.

What is three more than 8?

There are currently no comments for this tip. (Be the first to leave your comment—just use the simple form above!)


Videos

Subscribe to the Tips.Net channel:

Visit the Tips.Net channel on YouTube