HomeGlossaryHedge Fund

Hedge Fund

A hedge fund is a fund that pools money from investors who use riskier and more complex investment strategies in the expectation of substantial returns.

In other words, a hedge fund represents a pool of capital that buys and sells securities including stocks, bonds, currencies, commodities, and derivative products such as options and futures. The funds use more intricate investing strategies in a bid to protect their pooled capital from market volatility and uncertainty. 

Normally, hedge funds pool capital from wealthy individuals and families, pension funds and endowments, investment banking companies, and insurance firms. They usually operate as private investment partnerships or offshore investors, allowing them to work without registering with the market regulator and having to meet reporting requirements. 

Moreover, hedge funds are less regulated than mutual funds and have more freedom to employ investment strategies that can increase potential profits and losses. Having said that, hedge funds often use leverage, which involves borrowing money to purchase additional amounts of an asset to boost return potential. 

Most hedge funds are led by revered managers who have become very successful in hedge fund investing and this is what makes these funds appealing to investors. However, bear in mind that these money managers are quite pricey, with most of the hedge funds charging a fee of 1%-2% of assets, and a "performance fee" of around 20% of the profits.

Go back to our full glossary.

Author: Mircea Vasiu Updated: July 8, 2022