What Is A Hedge Fund?

The Hedge Fund

Hedge funds are their very own breed of mutual investment funds.  One thing that many investors first find peculiar about investing in hedge funds is that they can´t.  Hedge funds are very unique in that they are not open to the general public.  You have to be allowed to join a hedge fund, essentially invited.  Those invited to play in hedge funds are usually major investment groups or wealthy investors playing big.  The buy-in for investing in hedge funds can be several thousand to even a hundred thousand or more dollars.  Hedge funds trade stocks, bonds, and other securities just like a regular mutual fund.  Mutual hedge funds however do things that other funds do not: they hedge their bets.  This means a hedge fund places investments in many typical things like stocks and bonds, but it also buys a lot of stocks just for short selling or derivatives.  In a sense a hedge fund bets on the market both performing well and also performing poorly.  They are designed to make money, hedging their investments either way the market swings.

Hedge Fund Characteristics

There are other things aside from exclusivity that make mutual hedge funds distinct from their peers.  One major difference is performance incentives paid to hedge fund managers.  These performance incentives are in addition to the maintenance or management fees charged.  A management fee for a hedge fund is typically 1-4% of the hedge fund´s net asset value.  The net asset value of a hedge fund is the total combined worth of the fund´s invested assets.  This amount for many hedge funds can be in the billions of dollars.  The performance incentive is designed to push the hedge fund manager to look for ways to make the fund perform well.  A typical performance percentage for a hedge fund manager can be 20-40% or more of the profits a fund makes.  This can mean literally hundreds of millions of dollars of profits for a successful hedge fund manager.  While the amounts are high for sure, those investing in hedge funds are usually happy to pay it.  The more they pay the hedge fund manager in inventive fees means the more money they have made on their hedge fund investment.

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1. What Is A Mutual Fund?
2. What Is Equity Investing?
3. What Is A Flat Rate Fee?
4. What Is A Blue Chip Stock?
5. What Is A Stock?