What is a Hedge Fund?

When thinking of getting started with different investment instruments, one might end up being confused with all the technical terms that can be encountered. It is important to have a high degree of familiarization with these jargons to understand how your investment will work. Among others, one that you may be interested with would be hedge funds. When you say that you run a hedge fund, it can be understood as being similar to being a consultant. In its simplest form, a hedge fund can be seen as a private partnership that runs with minimal regulation from the U.S. Securities and Exchange Commission.


A simpler way of understanding the hedge fund is to think of it as an agreement that involves a manager and investors. There are limited legal forms that are available, such as Limited Liability Corporation or limited partnership. There is a legal agreement that is going to be signed beforehand to determine how the manager will have compensation. By its nature, the goal is to strive hard to achieve positive returns as much as possible, regardless of the prevailing market conditions. Compared to mutual funds, hedge funds can be placed in more securities, providing the investor with more possibilities. They can be invested in securities like in the case of bonds, real estate, and stocks, although they are more commonly placed in more risky investments. It also commonly utilizes a technique that is known as leverage, which essentially means borrowing money and having it invested.


Based on statistical data, the hedge fund is indeed a growing trend in the world of investment and it continues to attract more and more people. In fact, it is believed to grow into a $1 trillion industry in the coming years, with growth that is expected to increase by as much as 20% annually. More so, it is also important to know that hedge funds are highly specialized, which is why you will most likely need the expertise and experience of managers, or even an entire management team.


When you talk about hedge fund investments, you are not limited to one strategy only. In fact, there are more than 14 unique strategies each with a relevant level of reward and risk. In order to tap the best investment opportunities, it is critical to have an understanding of how each strategy differ from the other, and in the end, choose one with the most favorable return.


Another important thing to note about hedge funds is that they are only open to limited investors. The law requires an accreditation, which is basically why there are limitations. Aside from having significant knowledge about investments, the minimum annual income should be met, and one should at least have a net worth of $1 million.