Hedge Fund
A pooled investment fund that employs diverse and often complex strategies—including leverage, short-selling, and derivatives—to generate returns, typically available only to accredited investors.
A hedge fund is a private investment partnership that pools capital from wealthy individuals and institutional investors to deploy it using sophisticated strategies that are not permitted in traditional mutual funds. These strategies can include short-selling, leverage, derivatives, and investments in illiquid assets.
The name "hedge" originally referred to the practice of hedging—taking offsetting positions to protect against losses. In practice, many modern hedge funds pursue aggressive return strategies and take on significant risk. Performance and fees vary enormously across funds.
Hedge funds are generally restricted to accredited or qualified investors due to their complexity and higher risk. They charge substantially higher fees than most investment vehicles—the traditional structure is 2% of assets annually plus 20% of profits. For most retail investors, low-cost index funds and ETFs are a more accessible and often superior alternative.
Disclaimer
This article is for educational purposes only and does not constitute financial advice.