Investors are always on the hunt for investments that don’t move in lockstep with traditional stocks and bonds (particularly for investments that may rise when stocks or bonds are falling). Because they can invest further afield, hedge funds can have an easier time delivering those types of returns than mutual funds or other mainstream investments.
Given the barriers to entry for the average person, hedge fund investors typically include:
Family offices (a private company that handles investments for a very well-to-do family)
Hedge funds are pooled investment funds managed by a professional who pools investors’ money. They can invest in traditional stocks and bonds but also in riskier alternatives, like derivatives and commodities. They can be a good investment opportunity for people willing to take on greater risk for the potential of greater rewards, but they typically come with high fees.
The word “hedge” has a specific meaning in investing—it means to reduce risk by making an investment that offsets the risk of another investment. A common misconception is that hedge funds engage in hedging. Some do, but plenty don’t.
At one point in time, Bernie Madoff’s hedge fund was thought to be the largest in the world.
Just like Silicon Valley is the capital of the tech world, Greenwich, Connecticut, is the capital of the hedge fund world.
Hedge funds are professionally managed funds that pool investors’ money, like mutual funds.
Unlike mutual funds, hedge funds generally charge high fees, offer limited disclosures to investors, and may restrict when investors can withdraw their money.
Although hedge funds can follow many different types of investment strategies, they tend to be a high-risk investment option.
Because of their higher risk, hedge funds are typically only available to wealthy investors and institutions, like university endowments and pension funds.
The main potential benefits for those who do invest are the chance at higher returns and the opportunity for diversification.
A hedge fund is a fancy name for an investment partnership, just like “finger pants” is a fancy name for gloves. — Napkin Finance