WHAT IS A HEDGE FUND?
Hedge funds are frequently mentioned in the news. This definition will help explain the nature of the creature.
hedge fund is a private investment fund charging a performance fee and typically open to only a limited number of investors. Hedge funds are largely open to accredited investors only. They have grown in the public securities and private investment markets.
Hedge funds are not currently subject to any direct regulation by the SEC, the NASD, or other federal regulating commissions, unlike mutual funds, pension funds, and insurance companies. Some funds that trade commodity futures contracts are considered to be commodity pools, regulated by the Commodity Futures Trading Commission and National Futures Association.
The term is not tightly defined, but is used to distinguish such funds from retail investment funds, such as mutual funds that are available to the general public. Retail funds tend to be highly regulated, limited to holding a specific range of financial assets such as bonds, equities or money market instruments. Retail funds tend to have a restricted ability to borrow, leverage or hedge their investments, though they may have the ability to hedge via derivative contracts.
Hedge funds are limited only by the terms of the contracts governing the particular fund. Hedge funds may be either long or short assets and may enter into futures, swaps and other derivative contracts. In this way, hedge funds can follow more complex investment strategies.
The funds, often organized as limited partnerships, typically invest on behalf of high-net-worth individuals and institutions. Their primary objective is often to preserve investors’ capital by taking positions whose returns are not closely correlated to those of the broader financial markets.
Because of the substantial risks involved in unregulated, complex, and leveraged investments, hedge funds are normally open only to professional, institutional or otherwise accredited investors. This restriction is often implemented through limits on participating investors or minimum investment amounts.
Definition provided by wikipedia.com