Hedge funds are widely known as investment vehicles for the wealthy because of their high risk investment strategies. Similar to mutual funds, in the way that they employ a manager and that the investments are pooled together, hedge funds are drastically different in the type of investments they hold. Unlike your traditional mutual funds that generally hold blue chip stocks, such as Apple, Coca-Cola, Amazon and Google, hedge funds have no restrictions on the type of investments they can manage or the strategies they implement to generate returns. Although many hedge funds do hold stock in companies like the ones mentioned above, many hold some extremely unusual investments.

SEE: Taking A Look Behind Hedge Funds

Neverland Ranch
Well-known as the home of the late Michael Jackson, the outstanding mortgage on Neverland Ranch was bought in 2008 by Fortress Investment Group, in an arrangement made by the King of Pop to avoid going into foreclosure. The mortgage of roughly $24 million was later bought by Colony Capital LLC, a private equity firm, which, along with Jackson's estate, co-owned Neverland Ranch through a company called Sycamore Valley Ranch Company LLC. Unfortunately, there are no confirmed plans for the ranch at this time, although rumors have been stirring that the 2,500 acre estate in California may be turned into a state amusement park in the future.

SEE: The Pitfalls Of Buying A Foreclosure House

Weather
This may sound bizarre, but hedging against weather patterns has been around for over a decade. In the late 1990s, investment institutions began to realize that there was a real market for weather derivatives. Companies producing products dependent on the weather, or that could be affected by weather conditions, could now hedge against losses caused by extreme weather. In 1997, the first over-the-counter weather derivative was traded and a few years later the Chicago Mercantile Exchange introduced exchange-traded weather options and futures.

Today, the weather derivatives market is over $11 billion. According to an article published by the CME group in 2010, there are currently about 44 cities available for trading: 24 American cities, six Canadian cities, 11 European cities and three Japanese cities. PCE Investors Cumulus Funds offer both the Cumulus Energy Fund and Cumulus Fahrenheit Fund that involve weather derivative trading.

Prisons
Back in 2005, a hedge fund known as Pirate Capital owned around a 13% stake in a company called Cornell Companies, which runs prisons. Hedge funds have been commonly associated with prisons over the years, as many fund managers have been sentenced to serve time for a plethora of different crimes, but owning them is a different story.

Pirate Capital invested around $20 million and at the time became the largest shareholder of Cornell Companies; however, it appears the hedge fund no longer owns the position, since Cornell Companies was bought by rival GEO Group in 2010. In terms of diversifying assets to capture gains, this is a great example of the uncommon investments hedge funds will delve into.

SEE: 5 Strange New Ways To Invest

The Bottom Line
The hedge fund industry has always been very secretive and, until recently, one with little to no regulation. In 2011, the SEC implemented the Dodd-Frank Act to help impose stricter regulation on these types of investment vehicles. Previously, in many cases, advisors to private funds could avoid registration with the SEC. This allowed the advisors to fly under the radar and the SEC to have very little regulatory oversight into the private funds. The Dodd-Frank Act now requires most advisors to complete SEC registration detailing general fund data, size, ownership of the fund and the advisor's services to the fund.

According to an article recently released by Business Insider, the top 10 hedge funds in the world have over $387 billion assets under management. Even with the new regulation in place, the hedge fund industry is still thriving in this high risk, high reward atmosphere.

Related Articles
  1. Options & Futures

    What Does Quadruple Witching Mean?

    In a financial context, quadruple witching refers to the day on which contracts for stock index futures, index options, and single stock futures expire.
  2. Mutual Funds & ETFs

    The 4 Best Lord Abbett Mutual Funds

    Discover the four best mutual funds administered and managed by Lord, Abbett & Co., LLC that offer investors a wide variety of investment strategies.
  3. Stock Analysis

    Tribune Media: An Activist Investment Analysis (TRCO)

    Learn more about the breakup of Tribune Company, once a powerful newspaper and broadcasting giant, and the role of activist investor Cliff Robbins.
  4. Mutual Funds & ETFs

    The ABCs of Mutual Fund Classes

    There are three main mutual fund classes, and each charges fees in a different way.
  5. Investing Basics

    10 Habits Of Successful Real Estate Investors

    Enjoying long-term success in real estate investing requires certain habits. Here are 10 that effective real estate investors share.
  6. Investing Basics

    5 Types of REITs And How To Invest In Them

    Real estate investment trusts are historically one of the best-performing asset classes around. There are many types of REITs available.
  7. Investing Basics

    5 Simple Ways To Invest In Real Estate

    There are many ways to invest in real estate. Here are five of the most popular.
  8. Investing Basics

    5 Common Mistakes Young Investors Make

    Missteps are common whenever you’re learning something new. But in investing, missteps can have serious financial consequences.
  9. Options & Futures

    4 Equity Derivatives And How They Work

    Equity derivatives offer retail investors opportunities to benefit from an underlying security without owning the security itself.
  10. Stock Analysis

    Air Products and Chemicals: An Activist Investment Analysis (APD)

    Learn about the productive, and uncommonly friendly, activist investment made by Bill Ackman into Air Products and Chemicals.
RELATED FAQS
  1. What is a derivative?

    A derivative is a contract between two or more parties whose value is based on an agreed-upon underlying financial asset, ... Read Full Answer >>
  2. What is after-hours trading? Am I able to trade at this time?

    After-hours trading (AHT) refers to the buying and selling of securities on major exchanges outside of specified regular ... Read Full Answer >>
  3. What is securitization?

    Securitization is the process of taking an illiquid asset, or group of assets, and through financial engineering, transforming ... Read Full Answer >>
  4. What is the Writ of Mandamus?

    A writ of mandamus is a court order issued by a judge at a petitioner’s request compelling someone to execute a duty he is ... Read Full Answer >>
  5. Can hedge funds trade penny stocks?

    Hedge funds can trade penny stocks. In fact, hedge funds can trade in just about any type of security, including medium- ... Read Full Answer >>
  6. How liquid are Vanguard mutual funds?

    The Vanguard mutual fund family is one of the largest and most well-recognized fund family in the financial industry. Its ... Read Full Answer >>
Hot Definitions
  1. Flight To Quality

    The action of investors moving their capital away from riskier investments to the safest possible investment vehicles. This ...
  2. Discouraged Worker

    A person who is eligible for employment and is able to work, but is currently unemployed and has not attempted to find employment ...
  3. Ponzimonium

    After Bernard Madoff's $65 billion Ponzi scheme was revealed, many new (smaller-scale) Ponzi schemers became exposed. Ponzimonium ...
  4. Quarterly Earnings Report

    A quarterly filing made by public companies to report their performance. Included in earnings reports are items such as net ...
  5. Dark Pool Liquidity

    The trading volume created by institutional orders that are unavailable to the public. The bulk of dark pool liquidity is ...
Trading Center