hedge fund financial definition of hedge fund. hedge fund finance term by the Free Online Dictionary.

Hedge Fund

An aggressively managed fund portfolio taking positions in both safe and speculative opportunities.

Notes:

Most hedge funds are limited to a maximum of 100 investors. And for the most part, hedge funds (unlike regular mutual funds) are unregulated because it is assumed that the people investing in them are very sophisticated and wealthy investors.

Don't be fooled by the name: hedging is actually the practice of attempting to reduce risk, and the main goal of a hedge fund is to get a maximum rate of return, using strategies involving options, short selling, and leverage. On the other hand, because they often use futures, swaps, and arbitrage strategies, you could argue that hedge funds diversify away some of the investor risk of the stock market.

Hedge fund

An investment vehicle that somewhat resembles a mutual fund, but with a number of important differences. If the fund is "off-shore", the fund does not have to adhere to any SEC regulations (and can only sell to non-U.S. investors or investment vehicles). These funds employ a number of different strategies that are not usually found in mutual funds. The term "hedge" can actually be misleading. The traditional hedge fund is actually hedged. For example, a fund employing a long-short strategy would try to select the best securities for purchase and the worst for short sale. The combination of longs and short provides a natural hedge to market-wide shocks. However, much more common are funds that are not hedged. There are funds that are long-biased and short-biased. There are funds that undertake high frequency futures strategies, sometimes called managed futures. There are funds that take long-term macroeconomic bets, sometimes called global macro. There are funds that try to capitalize on merger and acquisitions. Another distinguishing feature of hedge funds is the way that managers are rewarded. There are two fees: fixed and variable. The fixed fee is a percentage of asset under management. The variable or performance fee is a percentage of the profit of the fund. There are also funds of funds which invest in a portfolio of hedge funds. Another important difference with hedge funds is that the minimum required investment is usually quite large and, as a result, minimizes the participation of retail investors.

hedge fund

A very specialized, volatile, open-end investment company that permits the manager to use a variety of investment techniques usually prohibited in other types of funds. These techniques include borrowing money, selling short, and using options. Hedge funds offer investors the possibility of extraordinary gains with above-average risk.

Case Study Even hedge fund managers with an excellent track record sometimes decide to throw in the towel. In March 2000 well-known hedge fund investor Julian Robertson announced that he had decided to close hedge funds managed by Tiger Management LLC, a firm he started in 1980. Saying he didn't understand the booming market for Internet stocks, the value investor who had accumulated an impressive record for beating the market indicated he would return approximately $4.5 billion to investors and retain nearly $1.5 billion of his own funds. Tiger Management had produced a loss of 19% in 1999 and an additional loss of 13% in 2000 up to the date of the announcement. Liquidation of the funds required that investment positions in Tiger Management's holdings, including U.S. Airways Group and Normandy Mining, would be gradually sold so that cash could be returned to Tiger's investors. Robertson announced the closing of his hedge fund just as Internet stocks had peaked and were heading for a major decline in value.