|
There is no exact definition to the term "hedge
fund", it is undefined in federal or state securities laws. There
is neither an industry-wide definition nor a universal meaning for "hedge
fund" according to the SEC. Since hedge
funds do not register with SEC, their actual data cannot be independently
followed; therefore hedge
fund data is self-reported. There are over 9,000 hedge
funds in the U.S. today. Hedge
Fund assets are estimated to manage $1.3 trillion in assets. Estimates
of new assets flowing into hedge
funds exceed $25 billion on average for the last few years.
The term "hedge
fund" is loosely defined and does not always imply a hedging
technique is being used. Hedge
funds today employ all different types of strategies, and the appropriate
description could simply be conveyed as “any unregistered, privately-offered,
managed pool of capital for wealthy, financially sophisticated investors.” Hedge
funds are usually structured as partnerships, with the general partner
being the portfolio manager, making the investment decisions, and the
limited partners as the investors. Hedge
fund managers attempt to produce targeted returns or absolute performance,
regardless of the underlying trends in the financial markets. They implement
a wide array of trading strategies, from equity, fixed-income, CTA portfolios,
or mathematical algorithms, however they each strive to capture market
inefficiencies.
Hedge
funds are subject to the same market rules and regulations as any
trader. The strategies they utilize are not as easily accessible, especially
for other regulated entities, such as mutual funds. To achieve this "absolute
return", hedge
fund managers have the flexibility to incorporate different strategies
and techniques that may include:
Short-selling: Sale of a security that you do not own, with the
anticipation of purchasing it in the future, at a reduced cost.
Arbitrage: Simultaneous buying and selling of a financial instrument
in different markets to profit from the difference between the prices
Hedging: Buying/selling a security to offset a potential loss
on an investment.
Leverage: Borrowing money for investment purposes.
Hedge
funds do not afford protection for the investor, which typically applies
to most registered investment products. This includes the full set of
protections applicable under federal and state securities laws. Simply,
you will not get the same disclosure and transparency from a hedge
fund than you would from a registered product, like a mutual
fund.
Related Reading:
 Hedge
Fund Definition
Origin
of Hedge Funds
Domestic
Hedge Funds or Offshore Hedge Funds
Hedge
Fund Managers
Why
Hire a Hedge Fund Administrator?
|
