Hedge Funds Explained

This article was written by Phineas Upham

A hedge fund is a portfolio that is aggressively managed, with the goal being growth no matter the stability of the economy. Hedge funds are typically a short-term investment, but can have long-term implications. Hedge funds look for a certain return on their investment, which may be defined as an absolute sum (IE $1 billion) or upon reaching a specified benchmark (IE operating capital exceeding $200 million).

These funds are structured to look like partnerships between private investors, and it is assumed that those participating are highly educated in the inner workings of finance. As a result, these funds are often less regulated than more mainstream forms of investment. They are also very exclusive, limiting the number of donors that can participate and setting high requirements for investments. Funds are also illiquid, for the most part, so it’s expected that an investor will put money into the fund for at least a year and grow it over time.

In the US, investors are required to be accredited before they can participate in a hedge fund. This means they are worth at least $1 million and earn a significant amount of their money through sound financial investments. Similar to mutual funds, they are professionally managed and pool money together from many people. However, unlike a mutual fund, hedge funds are free to take on greater risks.

This is where it gets complicated. The act of hedging actually reduces risk, but risk is a necessity for high rewards. In a broad sense, hedge funds do reduce risk. They can be good vessels to grow money if those involved are savvy enough to make good investments. Hedge funds are not set and forget, they require intimate attention to detail in order to be successful.