Coming up with an actual definition of a hedge fund, admittedly, can be challenging. In the past, hedge funds were defined as a "hedge", or a fail-safe against unexpected stock market declines, as they would sell the stock market short. Today the term is applied more broadly to any type of private investment partnership. All over the world, there are thousands of hedge funds in existence. Their primary objective is to make lots of money, and to make money by investing in all sorts of different investments and investments strategies. Most of these strategies are more aggressive than than the investments made by mutual funds.
In other words, a hedge fund would be a private investment fund that distinguishes itself through the different investment sources utilized. All the minutiae in handling the fund, from trading activity to the choice of different investments would be handled by the general partner. As for the limited partners, or investors, they would simply invest the money, or most of it, and gain profits from the fund. The general manager, in most cases, charges a management fee of nominal value, and large bonus for incentives in the event of a high ROI (return on investment).
At first glance, this looks every bit like a mutual fund being described, but the differences between mutual fund and hedge fund are quite distinct.
As mutual funds are under the governance of mutual fund or investment companies, they are subject to myriad regulations. Hedge funds, as private funds, have far fewer restrictions and regulations.
While mutual funds would only invest their client's money, hedge funds would invest money from two sources in their investments - both from the clients and their own pockets.
Normally, hedge funds would charge a performance incentive of 20 percent of all gains past a certain benchmark, thus on the same level as equity market returns. Even during the toughest of times, there have been reports of hedge funds generating annual rates of return exceeding 50 percent, which is indeed quite impressive.
Again, mutual funds are subject to many stringent requirements and policies, and this may include, but is not limited to short selling, investing in commodities, investing in offshoots of other products or unfair use of leverage. There are no such restrictions when it comes to hedge funds.
Because hedge funds are forbidden from soliciting investments, this may be why most of you may not be familiar with them. During the past half-decade a lot of these funds have multiplied exponentially when put in the right hands. Let it be known, though, that not all hedge funds have been that successful, as a lot of them, in fact, disappeared from the face of the earth for one reason or another.
In other words, a hedge fund would be a private investment fund that distinguishes itself through the different investment sources utilized. All the minutiae in handling the fund, from trading activity to the choice of different investments would be handled by the general partner. As for the limited partners, or investors, they would simply invest the money, or most of it, and gain profits from the fund. The general manager, in most cases, charges a management fee of nominal value, and large bonus for incentives in the event of a high ROI (return on investment).
At first glance, this looks every bit like a mutual fund being described, but the differences between mutual fund and hedge fund are quite distinct.
As mutual funds are under the governance of mutual fund or investment companies, they are subject to myriad regulations. Hedge funds, as private funds, have far fewer restrictions and regulations.
While mutual funds would only invest their client's money, hedge funds would invest money from two sources in their investments - both from the clients and their own pockets.
Normally, hedge funds would charge a performance incentive of 20 percent of all gains past a certain benchmark, thus on the same level as equity market returns. Even during the toughest of times, there have been reports of hedge funds generating annual rates of return exceeding 50 percent, which is indeed quite impressive.
Again, mutual funds are subject to many stringent requirements and policies, and this may include, but is not limited to short selling, investing in commodities, investing in offshoots of other products or unfair use of leverage. There are no such restrictions when it comes to hedge funds.
Because hedge funds are forbidden from soliciting investments, this may be why most of you may not be familiar with them. During the past half-decade a lot of these funds have multiplied exponentially when put in the right hands. Let it be known, though, that not all hedge funds have been that successful, as a lot of them, in fact, disappeared from the face of the earth for one reason or another.
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