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What Are Hedge Funds?

A hedge fund is an actively managed private investment fund that aims to meet high targeted returns (absolute returns) on there underlying investment. In simple words, hedge fund are funds managed by professional investors by using alternate investment strategies with an ultimate aim to mitigate risk/ loss associated with their method of investment and maximize profits from the underlying investment for their investors.

Hedge funds are private and unregistered investment pools which are similar to mutual funds in that they both are pooled investment vehicles that accept investors money and generally invest it on a collective basis. However, unlike mutual funds, hedge funds are not required to register under the law. They are not required to register because they generally only accept financially sophisticated investors and do not publicly offer their securities.

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hedge funds

Hedge fund definitions and regulations keep these types of investments out of the reach of common investors and traders. In most jurisdictions, hedge funds are open only to a limited range of professional or wealthy investors who meet criteria set by regulators, and are accordingly exempted from many of the regulations that govern ordinary investment funds. They generally use exotic investment strategies which are not allowed in more traditional organizations which is why investment vehicles such as mutual funds and index funds, rarely match the performance of hedge fund.

Hedge funds has the liberty to employ a broad range of investment strategies, including those that may be deemed “risky” in traditional investment wisdom. “Hedging” roughly means managing risk, hedge funds often seek to hedge some of the risks inherent in their investments using a variety of methods, notably short selling, futures, swaps and other derivative contracts and leverage. Hedge funds are exempt from many of the rules and regulations governing other mutual funds, which allows them to accomplish aggressive investing goals.

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