What is Hedge Fund? Definition of Hedge Fund, Hedge Fund Meaning - The Economic Times (2024)

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What is Hedge Fund? Definition of Hedge Fund, Hedge Fund Meaning - The Economic Times? ›

Definition: Hedge fund is a private investment partnership and funds pool that uses varied and complex proprietary strategies and invests or trades in complex products, including listed and unlisted derivatives.

A hedge fund is a limited partnership of private investors whose money is pooled and managed by professional fund managers. These managers use a wide range of strategies, including leverage (borrowed money) and the trading of non-traditional assets, to earn above-average investment returns.

Although it is not statutorily defined, the term encompasses any pooled investment vehicle that is privately organized, administered by professional money managers, and not widely available to the public."

Hedging is a risk management strategy employed to offset losses in investments by taking an opposite position in a related asset. The reduction in risk provided by hedging also typically results in a reduction in potential profits. Hedging requires one to pay money for the protection it provides, known as the premium.

While hedge funds can offer the potential for high returns, they come with a significant downside: high fees and expenses. These fees can eat into investment returns and reduce the overall profit margin.

There's no real prescribed target, but you should aim to have at least $5 million in AUM to be successful, while $20 million will make you noticeable to investors. Having $100 million will get you noticed by institutional investors.

Hedge funds were developed, in part, to help investors manage investment risk. Their market-neutral, or balanced, approach to investing helps seek out positive returns by investing in varied instruments over long- and short-term periods.

Restrictions and Limitations

For example, the U.S. Securities Act of 1933 bars non-accredited investors from certain private securities transactions, including hedge funds. Only qualified clients with $2.2 million in Managed assets can participate due to minimum hedge fund investments.

Hedge funds make money as part of a fee structure paid by fund investors based on assets under management (AUM). Funds typically receive a flat fee plus a percentage of positive returns that exceed some benchmark or hurdle rate.

Hedge funds use pooled funds to focus on high-risk, high-return investments, often with a focus on shorting — so you can earn profit even when stocks fall.

Why do they call it hedging? ›

As a verb, “hedge” originally meant to create a physical border or to guard land with a hedge. The phrase “to hedge a bet” first appeared in 1672 in a satirical play. Someone who “hedges” a bet is trying to protect him or herself from a loss by making a counterbalancing bet.

While hedging is not illegal, you need to make sure it fits within your gambling goals while betting on sports. Simply hedging for no reason means you pay more to the bookie and you are cutting your potential earnings.

BlackRock manages US$38bn across a broad range of hedge fund strategies. With over 20 years of proven experience, the depth and breadth of our platform has evolved into a comprehensive toolkit of 30+ strategies.

While hedge funds are only lightly regulated and carry high inherent risks, funds of hedge funds are thought to offer security because professional managers are picking the hedge funds that make up the pools.

How do hedge funds make money? Hedge funds take a management fee of between one and two per cent of the amount you invest. In addition, the hedge fund manager will receive a performance fee (usually around 20 per cent on any profit).

In sum, hedge funds are called hedge funds because they use a full array of hedging techniques to reduce portfolio volatility. They are becoming increasingly popular, as private ownership of capital expands worldwide and large-scale capital owners seek to preserve their wealth in volatile markets.

Hedge funds seem to rake in billions of dollars a year for their professional investment acumen and portfolio management across a range of strategies. Hedge funds make money as part of a fee structure paid by fund investors based on assets under management (AUM).