Most people are familiar with the phrase, “Don’t put all of your eggs in one basket.” Take that saying and multiply it by an aggressive strategy and you have the idea behind hedge funds. These funds spreads out investments to reduce risk while also pushing for the best possible return on investment.
A hedge fund is a portfolio of different investments that utilizes a number of different strategies, which combined with an aggressive management plan is meant to bring high returns for the investor. This aggression is coupled with a diverse set of investments so that difficulties in one market will not have too much an impact on the total amount invested. These funds are considered open-ended, meaning investors can withdraw money at regular intervals.
In a way hedge funds are similar to mutual funds, as both are professionally managed and spread out across a diverse set of investments, but hedge funds differ in their exclusivity. Hedge funds traditionally restrict the number of investors, and even set minimum investments that are often high. In the United States, regulations stipulate that the majority of investors in a mutual fund must meet certain requirements, like a net worth greater than $1 million. Though mutual funds and hedge funds began with the same goal–“hedging” investments against the risk of a bear market–they have differed in the strategy. Hedge funds today use a number of different investment tools and assume more risk. Depending on the hedge fund manager and their individual strategies, the fund itself can actually sometimes carry more risk than the market as a whole.
After the economic recession and market collapse of 2008, the U.S. government placed stronger restrictions on hedge funds meant to close regulatory gaps. Even with more restrictions hedge funds remain a large and important financial investment tool for the wealthy, with many funds worth several billion dollars, but still a small part of the overall investment picture. Hedge funds represent 1.1 percent of all funds held by financial institutions, making it a $1.9 trillion industry in all.
