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

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.

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. Investing Basics

    What Does Plain Vanilla Mean?

    Plain vanilla is a term used in investing to describe the most basic types of financial instruments.
  2. Professionals

    How to Sell Mutual Funds to Your Clients

    Learn about the various talking points you should cover when discussing mutual funds with clients and how explaining their benefits can help you close the sale.
  3. Investing

    Have Commodities Bottomed?

    Commodity prices have been heading lower for more than four years, being the worst performing asset class of 2015 with more losses in cyclical commodities.
  4. Mutual Funds & ETFs

    Top Three Transportation ETFs

    These three transportation funds attract the majority of sector volume.
  5. Professionals

    Fund and ETF Strategies for Volatile Markets

    Looking for short-term fixes in reaction to market volatility? Here are a few strategies — and their downsides.
  6. Investing Basics

    Statistical Proof That Buy-and-Hold Investing Pays Off

    Learn about how the data suggests that the buy-and-hold investment strategy still works, even after the huge declines of the Great Recession.
  7. Investing

    How Diversifying Can Help You Manage Market Mayhem

    The recent market volatility, while not unexpected, has certainly been hard for any investor to digest.
  8. Investing

    How to Win More by Losing Less in Today’s Markets

    The further you fall, the harder it is to climb back up. It’s a universal truth that is painfully apparent in the investing world.
  9. Options & Futures

    Pick 401(k) Assets Like A Pro

    Professionals choose the options available to you in your plan, making your decisions easier.
  10. Investing Basics

    5 Things To Ask Before Hiring A Financial Advisor

    Choosing a financial advisor isn't an easy task. Here's a list of the most important things to consider when planning for your financial future.
  1. Can mutual funds invest in hedge funds?

    Mutual funds are legally allowed to invest in hedge funds. However, hedge funds and mutual funds have striking differences ... Read Full Answer >>
  2. What are the main kinds of annuities?

    There are two broad categories of annuity: fixed and variable. These categories refer to the manner in which the investment ... Read Full Answer >>
  3. What are the risks of rolling my 401(k) into an annuity?

    Though the appeal of having guaranteed income after retirement is undeniable, there are actually a number of risks to consider ... Read Full Answer >>
  4. How do I get out of my annuity and transfer to a new one?

    If you decide your current annuity is not for you, there is nothing stopping you from transferring your investment to a new ... Read Full Answer >>
  5. Is a financial advisor allowed to pay a referral fee?

    A financial advisor is allowed to pay a referral fee to a third party for soliciting clients. However, the Securities and ... Read Full Answer >>
  6. When are mutual funds considered a bad investment?

    Mutual funds are considered a bad investment when investors consider certain negative factors to be important, such as high ... Read Full Answer >>

You May Also Like

Hot Definitions
  1. Gross Profit

    A company's total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company ...
  2. Revenue

    The amount of money that a company actually receives during a specific period, including discounts and deductions for returned ...
  3. Normal Profit

    An economic condition occurring when the difference between a firm’s total revenue and total cost is equal to zero.
  4. Operating Cost

    Expenses associated with the maintenance and administration of a business on a day-to-day basis.
  5. Cost Of Funds

    The interest rate paid by financial institutions for the funds that they deploy in their business. The cost of funds is one ...
  6. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!