What Are Hedge Funds?

What are hedge funds? In today’s day and age, many people find themselves asking the question, and it’s important to take a look at it closely.

what are hedge fundsAs you learn more about hedge funds and the hedge fund industry, you may find yourself altering your investment strategy in the future.

Generally speaking, a hedge fund is an aggressively managed portfolio using advanced investment strategies – including leveraged, long, and short positions – as a means of returning higher than average returns (when compared to a specific market).

In most cases, hedge funds are setup as private investment firms open to a limited number of investors while requiring a large initial investment, typically around a minimum of $1 million. Larger hedge funds – those with total assets under management above $1 billion – will, in most cases, have higher minimum investment requirements.

It’s important to note that investments in hedge funds are not considered “liquid,” as most require investors to keep their money in the fund for a particular period of time, typically one year or more.

What you need to know

At this point, you likely have a better idea of what hedge funds are all about and how tracking these can improve your investing strategy, and if not, check out our look at how to be a hedge fund manager.

Knowing the basics will help you get started, however, there are more details you need to become familiar with:

1. Unlike mutual funds, for example, hedge funds are typically unregulated because they cater to only the most advanced investors. That being said, United States law requires the majority of investors to be accredited. In other words, they must have a significant amount of knowledge, earn a minimum amount of money every year, and have a net worth exceeding $1 million.

2. Many people think of hedge funds as nothing more than “mutual funds for the rich.” These are similar in many ways, including the fact that investments are pooled together and professionally managed.

On the other side of things, the difference is that hedge funds have more flexibility in terms of investment strategies.

3. Despite the name (hedge means to reduce risk), the primary goal of a hedge fund is to maximize return on investments. In today’s world, hedge funds use a variety of tactics, so it is no longer accurate to assume that these funds do nothing more than hedge risk.

It is important to understand that hedge funds often times carry more risk than your run-of-the-mill market-based ETF, as hedge fund managers sometimes make speculative investment choices in an attempt to “win big in the market,” so to speak. Examples of this type of behavior include John Paulson‘s bet on the collapse of the subprime housing market with mortgage backed securities in 2007, or George Soros‘s bet against the British pound in 1992.

Top Performing Hedge Funds

While you may never manage a hedge fund yourself, this does not stop you from keeping a close watch on what others are doing.

Here are five of the top performing hedge funds:

Now that you have answered the question “what are hedge funds” you have a better idea of what these investments have to offer, and whether or not you can work this into your current investment strategy.