Define a Hedge Fund

Hedge Fund Definition

How can you define a hedge fund? What are hedge funds? If you are looking for a description of a hedge fund here is a simple hedge fund definition; it is a fund that invest with strategies that are considered to be “risk” by the average financial advisor.

The Hedge fund was created in 1949 by Alfred W. Jones. He speculated that by investing into both long and short positions at the same time they could hedge their investment portfolio and make a much more stable return then if he just invested into long positions.

The theory is, if the market falls the profits on the short positions would make up for the loss on the long positions. If the market goes up the profits on the long positions would balance out the losses on the short positions.

Overall the idea is that by buying the strongest stocks and shorting the weakest stocks an investor can make a much more stable return without experience the large loss in bears markets that other funds experience.

In addition to shorting a hedge fund can buy options, invest into currency, buy on leverage etc. Basically they are free to do whatever they want to.

Hedge Funds Pros Cons Risk

Most people consider them to be riskier than other mutual funds because they invest with high leveraged and with “high risk” strategies. However, many funds have actually been shown to be more stable and more consistent then the market.

While most are not as volatile as the market, some are. So of course do your research beforehand.

Hedge Funds do come with the risk of losing money like other funds, but they are built to be “safer” then other funds. Again this varies from fund to fund.

Description of Hedge Funds and Their Eligibility Requirements

No hedge fund definition would be complete unless it was made clear that only “Accredited Investors” can invest into these funds by law. This is to limit the amount of inexperienced investors investing into these “higher risk” and more complicated investments.

In order to be considered an “Accredited investor” one must fit the following circumstances.

• Have a Net Worth of over $1 million dollars

• Have had an annual income of at least $200,000 in the last two years

• When combined with a spouse have a income of $300,000 or more for the last 2 years

• Expect to make that much again in the near futureHedge fund investing is Illegal for anyone not fitting those criteria.

In addition to that the SEC limits the amount of investors that the fund can have to 100. Because of this many funds will have a minimum initial investment. This can be anywhere from $10,000-$10 million depending on the company.

Define a Hedge Fund and it’s Fees

Hedge Fund generally charge both a management fee, which can be anywhere between 1-4% of the account and a performance fee which is normally between 20-45%. Most funds will take all the fees out before reporting tax earnings.

Now You Know How a Hedge Fund Works

Hopefully if you were wondering how a hedge fund works and where looking for a hedge fund definition or a description of a hedge fund this has helped you out.

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