A hedge fund is a specific type of investment fund that is typically the domain of investors with a lot of experience. The reason why a hedge fund is perhaps better suited to a sophisticated investor is because the investors often have to fulfill certain requirements in order to be considered accredited/qualified. Hedge funds are also primarily run by a limited partnership, or a limited liability company, which places a money manager in charge of making decisions about investments made with the hedge fund.
For your average investor, a hedge fund would not be something they deal with, due to the fund’s complicated nature. For those with investment experience (and a lot of money to invest), hedge fund investments can be lucrative. A hedge fund has the benefit of being extremely versatile, and works in many ways like an entire portfolio; the money manager can choose to invest in a variety of different areas in order to maximize return under any market conditions. Hedge fund investments deal with more than just stocks, bonds and basic trading – hedge fund investments can be used to support startups, currency, and much more. Essentially, anywhere a money manager sees the opportunity to reap huge gains at little risk; a hedge fund investment may take place. This can involve either short or long positions. Hedge fund investments can be centered on one country, or can reach a global scale – it is up to the wisdom of the money manager to decide what market to engage in.
For the most part, most hedge funds are unregulated as many states do not require registration with the Securities and Exchange Commission. However, despite the “unregulated” status, the money managers (who are skilled investment professionals) are indeed required to adhere to the same market regulations as everyone else as they go about the business of managing the hedge fund portfolio. There is nothing illegal or dubious about hedge funds, when properly managed.
The term “hedge fund” refers in some cases to “hedging” against the market, or deliberately using techniques designed to reduce financial risk. In recent years, however, the “hedging” side of hedge funds (i.e., reducing risk as much as possible in terms of investment choices) has become rather fluid. Some money managers prefer to invest in volatile, fast-moving markets because the returns can be even more substantial.
Because of the many different financial techniques employed by hedge fund experts, there is no single definition or example of a hedge fund to be found. Some portfolios may reflect a cautious financial mind, and some may be far more adventurous. A good hedge fund manager will do their best to combine several strategies for making big returns at once, rather than relying on one method. Many hedge fund managers have an area of expertise and will focus on their field of skill. When entering into a hedge fund partnership as an investor, be sure to know exactly what the portfolio manager specializes in, and how much experience they have with hedge fund investments in total.