What is a Hedge Fund?
A hedge fund refers to a collection of investments that is aggressively managed to utilize innovative strategies to generate high profits. Such strategies could be short term or long term and may be leveraged locally or internationally. In most cases, hedge funds are established as investment partnerships of a private nature open to a specific number of investors. Hedge funds require huge capital investment to set up. Investments put in hedge funds are often not liquid because hedge funds oblige investors to maintain their money with the fund for a minimum of one year. Unlike other mutual funds, hedge funds are not regulated. This is because they take care of complicated investors. US laws require accreditation of majority investors within a hedge fund. Accreditation in this case means that the investors must be able to earn a set minimum amount every year and their net worth be more than $1 million. The investors should also have a considerable amount of knowledge in investment.
How Hedge Funds Work
Based on the investment requirements, hedge funds can be said to be funds set up for superrich, high net worth individuals. Just like mutual funds, hedge funds are managed professionally and pool investments together. However, they are different from mutual funds in the sense that hedge funds are more flexible in terms of their investment strategies. Hedging actually refers to the practice of trying to reduce risks. However, the objective of many hedge funds is maximizing profits or their investment returns. Hedge funds use numerous strategies to maximize returns hence they do not only try to minimize risk but they work to make huge profits as well. In actual fact, since managers of hedge funds speculate on investments, hedge funds carry huge risks compared to other funds in the market.