hedge fund


Hedge fund

An investment vehicle that somewhat resembles a mutual fund, but with a number of important differences. If the fund is "off-shore", the fund does not have to adhere to any SEC regulations (and can only sell to non-U.S. investors or investment vehicles). These funds employ a number of different strategies that are not usually found in mutual funds. The term "hedge" can actually be misleading. The traditional hedge fund is actually hedged. For example, a fund employing a long-short strategy would try to select the best securities for purchase and the worst for short sale. The combination of longs and short provides a natural hedge to market-wide shocks. However, much more common are funds that are not hedged. There are funds that are long-biased and short-biased. There are funds that undertake high frequency futures strategies, sometimes called managed futures. There are funds that take long-term macroeconomic bets, sometimes called global macro. There are funds that try to capitalize on merger and acquisitions. Another distinguishing feature of hedge funds is the way that managers are rewarded. There are two fees: fixed and variable. The fixed fee is a percentage of asset under management. The variable or performance fee is a percentage of the profit of the fund. There are also funds of funds which invest in a portfolio of hedge funds. Another important difference with hedge funds is that the minimum required investment is usually quite large and, as a result, minimizes the participation of retail investors.

Hedge Fund

A pool of liquidity that is allowed to use aggressive techniques prohibited in mutual funds and other funds. That is, hedge funds often engage in short selling, arbitrage, and leverage trading, among others. Hedge funds are exempt from many regulatory requirements; for example, they are often exempt from registration with the SEC. Generally speaking, hedge funds are set up as partnerships into which an investor may buy for a minimum investment, usually anywhere from $250,000 to over $1,000,000. As a result, most hedge fund investors are institutional investors and high net-worth individuals. In order to avoid as many regulations as possible, most hedge funds are limited to 100 investors or less. Like mutual funds, they charge management fees, but, unlike other funds, they often take a percentage of the profits from investors. Hedge funds tend to be illiquid as they often require investors to maintain their investment for at least one year.

hedge fund

A very specialized, volatile, open-end investment company that permits the manager to use a variety of investment techniques usually prohibited in other types of funds. These techniques include borrowing money, selling short, and using options. Hedge funds offer investors the possibility of extraordinary gains with above-average risk.
Case Study Even hedge fund managers with an excellent track record sometimes decide to throw in the towel. In March 2000 well-known hedge fund investor Julian Robertson announced that he had decided to close hedge funds managed by Tiger Management LLC, a firm he started in 1980. Saying he didn't understand the booming market for Internet stocks, the value investor who had accumulated an impressive record for beating the market indicated he would return approximately $4.5 billion to investors and retain nearly $1.5 billion of his own funds. Tiger Management had produced a loss of 19% in 1999 and an additional loss of 13% in 2000 up to the date of the announcement. Liquidation of the funds required that investment positions in Tiger Management's holdings, including U.S. Airways Group and Normandy Mining, would be gradually sold so that cash could be returned to Tiger's investors. Robertson announced the closing of his hedge fund just as Internet stocks had peaked and were heading for a major decline in value.

Hedge fund.




hedge fund

a pool of capital which fund managers (for example, international banks) used to speculate on the foreign exchange, stock and commodity markets. Fund managers aim to make windfall profits by ‘correctly’ guessing future price movements. Their activities, which have become increasingly global and largely unsupervised by national regulatory frameworks, have, on occasion, served to destabilize the financial markets. See HEDGING, OPTIONS, FORWARD MARKET, DERIVATIVE.
References in periodicals archive ?
December returns and November asset flows for the Morningstar Hedge Fund Indexes are based on funds that reported as of Jan.
Given the increasing role hedge funds are playing in the insurance industry, high-profile problems such as the recent disclosure of Amaranth Advisors LLC's $6 billion loss on energy trades may shed light on the dangers inherent when high-risk players mix with the risk-mitigation business.
Chief among the new priorities is the new rule on Shared National Credits (SNC), including enhanced disclosure by hedge funds and other counterparties of CSFFs.
In addition, most hedge funds prefer a large open area for trading, a conference room, several private offices and a warm reception area for greeting clients.
To achieve superior performance, rigorous professional hedge fund portfolio management will be necessary.
The good news for CPAs and their clients is that most hedge funds are run by experienced managers whose goal is to minimize risk--not overdose on it.
Among corporate pension plans, 17 percent with assets above $5 billion use hedge funds, while another 7 percent anticipate hiring a hedge fund manager.
Although estimates of the relative impotance of hedge fund business to banks are not hard numbers, data obtained from two of the most active banks indicate that all of their hedge fund customers (as defined by the banks) together account for well under 10 percent of their total net trading revenue.
Twenty-five years later, the beginning of the end of Soros's hedge fund came when his deputy, Stanley Druckenmiller, quit his position.