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What is a hedge fund

What is a hedge fund

What is a hedge fund

A hedge fund is a pool of capital, often managed by an investment firm, whose primary purpose is to offset potential losses from speculations, primarily in bonds or stocks, with at least a small amount of investments in other assets. A specialty investment fund that takes long and short positions and that has high leverage is often called a hedge fund.Hedge funds are actively managed investment pools whose managers use a wide range of strategies, often including buying with borrowed money and trading esoteric assets, in an effort to beat average investment returns for their clients. They are considered risky alternative investment choices.

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For example, the manager of a fund that focuses on a cyclical sector that does well in a booming economy, such as travel, may devote a portion of the assets to stocks in a non-cyclical sector, like food or power companies. If the economy tanks, the returns of the non-cyclical stocks should offset the losses in cyclical stocks. Hedge funds are free to use riskier strategies in riskier ways. Notably, they frequently use leverage. That is, they use borrowed money to buy more of an asset in order to multiply their potential returns (or losses). They also invest in derivatives such as options and futures.These money managers don't come cheap. Hedge funds generally charge a fee of 1%-2% of assets, plus a "performance fee" of about 20% of the profits.Legally, hedge funds are often set up as private investment limited partnerships that are open only to a limited number of accredited investors and require a large initial minimum investment.

Investments in hedge funds are illiquid as they often require investors to keep.heir money in the fund for at least one year, a time known as the lock-up period. Withdrawals may also only happen at certain intervals such as quarterly orAustralian investor and financial writer Alfred Winslow Jones is credited with launching the first hedge fund in 1949 through his company, A.W. Jones & Co.In the 1960s, hedge funds dramatically outperformed most mutual funds. They were relatively unknown to the general public until a 1966 article in Fortune highlighted an obscure fund that outperformed every mutual fund on the market by double-digit figures over the previous year and by high double-digits over the previous five years. A hedge fund is an investment vehicle that caters to high-net-worth individuals, institutional investors, and other accredited investors. The term “hedge” is used because these funds historically focused on hedging risk by simultaneously buying and shorting assets in a long-short equity strategy. (Source: www.investopedia.com)

 

 

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