Financial Management | Corporate Accounting

What is a Hedge Fund in Simple Terms

In Europe and the United States, hedge funds are private investment organizations.

These are typically structured as limited liability partnerships, with the general partner serving as a portfolio manager and making investment decisions and the other partners serving as investors.

The investor partners are super-rich institutions, professionals and wealthy individuals (the minimum investment amount ranges from $250,000 to $1m). Investment in hedge funds is generally for a lock-in period of one year and so.

The funds offered by all partners, including all general partners, are pooled and then invested into different financial assets, including derivatives. The investment strategy employed by these funds is usually dynamic and flexible. The funds will take any steps legal, for instance, leverage and short, long swaps, futures, swaps derivatives and other options on the international and domestic markets to earn high returns on the investments that the investors make.

Hedge funds are subject to the same market rules and regulations as any trader.

There are no such limitations on the hedge funds as apply to the other pooled investments like mutual funds. No registration is necessary with the Securities and Exchange Commission or Financial Services Authorities. No special reports have to be submitted, and no investors protection guidelines have to be followed. However, like mutual funds, hedge funds are subject to anti-fraud provisions of securities laws.

History of Hedge Funds

The first hedge fund was set up by A. W. Jones in 1949 in the USA. This fund was to protect its investors against risk using various techniques, i.e. heading of risk was the core of its investment strategy. Hence, it was referred to as a Hedge Fund. Today the term ‘Hedge Fund’ refers not to such as hedging techniques, which hedge funds may or not employ, as it does to their status as private and unregistered investment pools.

Hedge funds generally provided very high returns to the investors even during the falling share prices, though there have been some cases of enormous losses, and there have been some frauds. These types of investments are suitable for people ready to take risks with a considerable amount of money.

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