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What is a hedge fund?
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Why is it called a Hedge fund?
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Hedge fund risk?
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Hedge funds are investment funds that generally have the following three features: Typically set up as private investment partnerships. The manager uses alternative investment techniques, such as short selling, margin investing and derivatives. Generally, the fund pursues maximum absolute returns, no matter the direction of the market.
Web Reference: none
Hedge funds are defined by their structure rather than any specific investment method. These pooled investment vehicles are commonly set up as limited partnerships in which the manager acts as the general partner while the investors act as the limited partners. Oddly, the term ‘hedge fund’ is a misnomer. Not all hedge funds are hedged. Hedge funds invest in any number of strategies regardless of the common term that attempts to corral them. These strategies include investing in asset classes such as stocks, bonds, commodities, currencies, and return enhancing tools such as leverage, derivatives, and arbitrage. Some funds, however, are simply 100% long equity securities.
Web Reference: http://www.hedgeco.net/hedgeducation/What-is-a-hedge-fund-faq1.htm
This is a short history and definition of a Hedge Fund. The first hedge fund was set up by Alfred W. Jones in 1949. Jones was the first to use short sales and leverage techniques in combination. In 1952, he converted his general partnership fund into a limited partnership investing with several independent portfolio managers and created the first multi-manager hedge fund. In the mid 1950's other funds started using the short-selling of shares, although for the majority of these funds the hedging of market risk was not central to their investment strategy.
In 1966, an article in Fortune magazine about a "hedge fund" run by a certain A. W. Jones shocked the investment community. Apparently, the fund had outperformed all the mutual funds of its time, even after accounting for a hefty 20% incentive fee. This is because the rate of return was higher on the hedge fund versus all other mutual funds.
"Hedge fund" is a general, non-legal term that was originally used to describe a type of private and unregistered investment pool that employed sophisticated hedging and arbitrage techniques to trade in the corporate equity markets. Hedge funds have traditionally been limited to sophisticated, wealthy investors. Over time, the activities of hedge funds broadened into other financial instruments and activities. Today, the term "hedge fund" refers not so much to hedging techniques, which hedge funds may or may not employ, as it does to their status as private and unregistered investment pools.
Hedge funds 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, they are regulated in significantly different ways. Up until 2005, hedge funds in the United States often relied on Section 4(2) and Rule 506 of Regulation D of the Securities Act of 1933 to avoid having to register their securities with the Securities and Exchange Commission of the United States (SEC). Further, to avoid regulation regarding mutual funds (a type of “investment company”), hedge funds relied on Sections 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940. In short, hedge funds escaped most U.S. regulation directed at other investment vehicles such as mutual funds.
European nations regulate hedge funds by either regulating the type of investor who can invest in a hedge fund or by regulating the minimum subscription level required to invest in a hedge fund. In the years to come, experts are predicting the rise of an alternative regulatory framework that will be tiered yet flexible.
Web Reference: www.uiowa.edu/ifdebook/
Hedge funds are simply pools of money from individuals and or groups of qualified investors who met the requirements of the SEC. Unlike mutual funds, they do not trade on exchanges, and are not registered with the Securities and Exchange Commission; their investors are not granted the same consumer-protection benefits extended to mutual funds through the 1940 Investment Company Act.
Web Reference: www.qubitrage.com
For the most part, hedge funds (unlike mutual funds) are unregulated because they cater to sophisticated investors. In the U.S., laws require that the majority of investors in the fund be accredited. That is, they must earn a minimum amount of money annually and have a net worth of more than $1 million, along with a significant amount of investment knowledge. You can think of hedge funds as mutual funds for the super rich. They are similar to mutual funds in that investments are pooled and professionally managed, but differ in that the fund has far more flexibility in its investment strategies.
It is important to note that hedging is actually the practice of attempting to reduce risk, but the goal of most hedge funds is to maximize return on investment. The name is mostly historical, as the first hedge funds tried to hedge against the downside risk of a bear market by shorting the market (mutual funds generally can't enter into short positions as one of their primary goals). Nowadays, hedge funds use dozens of different strategies, so it isn't accurate to say that hedge funds just "hedge risk". In fact, because hedge fund managers make speculative investments, these funds can carry more risk than the overall market.
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