Professional fund managers invest money into hedge funds with the aim of generating favorable returns irrespective of market conditions [1]. In an effort to increase their earnings, they use a variety of aggressive and dangerous investing techniques, including short selling, leveraging, and trading derivatives [1]. Hedge funds, in contrast to mutual funds, are primarily unregulated and target wealthy, well-educated individuals who can afford the higher investment minimums and associated risks [2].
History and Growth of Hedge Funds
Alfred Winslow Jones founded the first hedge fund in the modern period in 1949 by being the first to "hedge" his portfolio against market downturns using leverage and short sales [1]. When well-known money managers started their own hedge funds in the 1990s after leaving the mutual fund business, hedge funds became more well-known [1]. With over $4.3 trillion in assets under management handled by more than 9,000 hedge fund managers globally, the hedge fund sector has expanded significantly in the modern era [1].
Hedge Fund Strategies and Fees
Many different investment methods are used by hedge funds, such as global macro, event-driven, long-short equities, and quantitative trading [4]. In order to increase profits, these techniques frequently make use of leverage, derivatives, and other intricate financial instruments [1, 4]. Hedge fund managers usually charge a 20% "performance fee" on any gains made in addition to a 2% management fee [1].
Regulation and Risk
Compared to standard investment vehicles, hedge funds are subject to comparatively less regulation because they are only required to register with the SEC if they manage more than $150 million in private money [1]. Due to the fact that hedge funds frequently take on large amounts of leverage and engage in speculative trading, this lack of monitoring has raised worries about the dangers involved with investing in them [1-2]. To engage in these high-risk, high-fee investment vehicles, hedge fund investors must be accredited, which means they have a high net worth and income [3].
Conclusion
Hedge funds are intricate, unregulated financial vehicles used by wealthy, well-educated investors.Anyone thinking about investing in a hedge fund has to carefully evaluate the enormous dangers associated with them, notwithstanding the possibility of earning outsized rewards.
References
Gad, S. (2024, February 3). What Is a Hedge Fund? Investopedia. https://www.investopedia.com/articles/investing/102113/what-are-hedge-funds.asp
Comments of David A. Vaughan for the SEC Roundtable on Hedge Funds. (n.d.). https://www.sec.gov/spotlight/hedgefunds/hedge-vaughn.htm
Hedge Funds | Investor.gov. (n.d.). https://www.investor.gov/introduction-investing/investing-basics/investment-products/private-investment-funds/hedge-funds
Team, I. (2024, April 12). Hedge Fund: Definition, Examples, Types, and Strategies. Investopedia. https://www.investopedia.com/terms/h/hedgefund.asp