Hedge funds are aggressively managed portfolios that use advanced investment strategies in effort to generate high returns (either in an absolute sense or over a specified market benchmark). They can be thought of as mutual funds for the super rich. They are similar to mutual funds in that investments are pooled and professionally managed, but differ in that the fund has far more flexibility in its investment strategies.

It is important to note that hedging is actually the practice of attempting to reduce risk, but the goal of most hedge funds is to maximize return on investment. The name is mostly historical, as the first hedge funds tried to hedge against the downside risk of a bear market, by shorting the market (mutual funds generally can't enter into short positions as one of their primary goals). Nowadays, hedge funds use dozens of different strategies, so it isn't accurate to say that hedge funds just "hedge risk." In fact, because hedge fund managers make speculative investments, these funds can carry more risk than the overall market.

Structurally, a hedge fund has some similarities to a mutual fund. For example, just like a mutual fund, a hedge fund is a pooled investment vehicle that makes investments in equities, bonds, options and a variety of other securities. It can also be run by a separate manager, much like a sub-advisor runs a mutual fund that is distributed by a large mutual fund company. That, however, is basically where the similarities end. The range of investment strategies available to hedge funds and the types of positions they can take are quite broad and in many cases, very complex. We will focus on specific strategies later in this section, so for now we'll focus on how hedge funds are structured.

Related Reading:



Organizational Structure

Related Articles
  1. Financial Advisor

    Understanding a Hedge Fund Manager's Worth

    Hedge funds pool investors’ money much like mutual funds. However, they are not as closely regulated as mutual funds, and although their investments may include stocks, bonds and other traditional ...
  2. ETFs & Mutual Funds

    Evaluating Hedge Fund Performance

    Most investors are aware of hedge funds, but many don't know the dirty details of this unique investment type.
  3. Financial Advisor

    Why Hedge Funds Are Not Living Up to Return Hype

    Hedge funds are supposed to produce better returns while protecting your investments from the downside. Here's why they are not living up to their purpose.
  4. Managing Wealth

    Will Hedge Funds Be Around in 10 Years?

    Learn why some analysts see hedge funds as a dying breed, especially after a torturous January 2016 for fund managers around the world.
  5. ETFs & Mutual Funds

    4 Reasons to Still Consider Traditional 2 & 20 Hedge Funds

    Find out why traditional 2 & 20 hedge funds are still worth considering as an investment, even though they have underperformed for the last several years.
  6. Investing

    HF Performance Report: Did Hedge Funds Earn Their Fee in 2015?

    Find out whether hedge funds, which have come under tremendous pressure to improve their performance, managed to earn their fee in 2015.
  7. ETFs & Mutual Funds

    The Difference Between Mutual Funds And Hedge Funds

    Both mutual funds and hedge funds are managed portfolios. A manager chooses securities and then lumps them into a single portfolio.
  8. ETFs & Mutual Funds

    Fund Of Funds - High Society For The Little Guy

    Like a mutual fund, FOFs provide instant diversity by grouping many hedge funds into one product.
  9. ETFs & Mutual Funds

    6 Reasons Hedge Funds Underperform

    Understand the hedge fund industry and why it has grown exponentially since 1995. Learn about the top six reasons why the industry underperforms.
  10. ETFs & Mutual Funds

    How To Start a Hedge Fund In the United States

    A general overview of how to start a hedge fund firm in the United States, including complying with state and federal regulations.
Trading Center