Hedge Fund
A pooled investment fund that employs advanced strategies to generate returns for accredited investors.
Definition
A hedge fund is an alternative investment vehicle that pools capital from accredited investors and institutional investors to employ diverse and often aggressive strategies to generate returns. Unlike mutual funds, hedge funds can use leverage, short selling, derivatives, and invest in illiquid assets. They typically charge a "2 and 20" fee structure — 2% management fee plus 20% of profits. Hedge funds are less regulated than mutual funds and require investors to meet minimum wealth thresholds (typically $1 million+ net worth). Strategies include long/short equity, global macro, event-driven, and quantitative. While some hedge funds have delivered exceptional returns, the average hedge fund has underperformed the S&P 500 over the past decade.
Related Terms
Mutual Fund
A pooled investment vehicle managed by professionals that invests in stocks, bonds, or other securities.
TradingShort Selling
Selling borrowed securities with the expectation of buying them back at a lower price for profit.
TradingLeverage
Using borrowed capital to increase the potential return of an investment.
TradingOptions
Financial contracts giving the buyer the right, but not the obligation, to buy or sell an asset at a set price.