A hedge fund is a private, unregistered investment fund that pools capital from accredited investors (wealthy individuals and institutions) to invest in a wide range of assets using complex strategies. Unlike mutual funds, their primary goal is to generate absolute returns—profits regardless of whether the market is rising or falling.
Key Characteristics
Hedge funds operate with high flexibility, allowing them to pursue different goals than traditional investment funds, but this comes with restrictions on who can invest.
Limited Access: They are generally only open to accredited investors (those meeting specific high income or net worth requirements) and large institutions. They are not available to the general public.
Minimal Regulation: They are lightly regulated compared to mutual funds, giving managers greater freedom to use aggressive and unconventional trading techniques.
High Fees: The typical fee structure is known as "2 and 20," which includes:
A Management Fee of about 1-2% of the assets under management (AUM).
A Performance Fee of about 20% of the profits generated.
Use of Leverage: They frequently use leverage (borrowed money) to amplify the size of their positions and potentially magnify both returns and losses.
Illiquidity: Investments often have lock-up periods (restricting withdrawals for a set time) and limited redemption windows (e.g., quarterly), making the capital illiquid.