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The Daily Dose: Questions For Stock Traders

What is a Hedge Fund?

By January 10, 2019No Comments

Private Investment Funds For Wealthy Individuals:

Hedge Funds use pooled capital from accredited investors in order to generate an active return. Hedge fund managers can employ a handful of different strategies with the goal of achieving high returns. The term “hedge fund” can be confusing because Hedging is actually the practice of attempting to reduce risk, yet most hedge funds these days have the opposite goal of maximizing return on investment. The first hedge funds in existence did try to hedge against the downside risk of a bear market by shorting stocks, but the industry has taken on a completely new identity since then. In general, investing in hedge funds is actually more of an aggressive, risk-seeking approach with higher fees than most other investment options. In addition to that, they typically require a large initial minimum investment and can be quite illiquid depending on the Lock-Up Period. The attributes of hedge funds has made them prone to some of the most remarkable financial blowups in history. Even so, the hedge fund industry only continues to grow as time goes on.

There are several key characteristics of hedge funds thats sets them apart from other investment vehicles. First, they’re only open to qualified investors. This means investors must have an annual income over $200,000 for the past two years or a net worth over $1,000,000 (excluding primary residence). Second, they offer a wider investment latitude than other funds. While mutual funds, for example, typically stick to buying just stocks and/or bonds, hedge funds venture into real estate, derivatives, currencies, and more, to both the long and short side. Third, they oftentimes employ leverage, meaning they use borrowed money in order to amplify returns. Last, the fee structure includes both an expense ratio (typically around a 2% asset management fee) and a performance fee (typically around 20% of any gains generated). Currently. Ray Dalio’s Connecticut-based Bridgewater Associates is the largest hedge fund in the world. With roughly 1,700 employees and $125 billion in assets under management, the fund employs a global macro investing strategy, meaning they focus on things like inflation, GDP, currency exchange, etc. In total, there are thousands of hedge funds operating across the world with over $3 trillion total assets under management.

Related Post: What is an Index Fund?

Matt Thomas

Founder of, Creator of the Trading Success Framework Course & Trading Paradigm Skool Community, and Intraday Futures Trader Using Auction Market Theory & Profiling (Volume & Market Profile).

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