What are Hedge Funds?

A hedge fund is simply an investment fund that is made up of either institutional investors or the “big players” of Wall Street. Much like any investment firm, the money is professionally managed, but hedge funds are not as regulated as mutual funds and the like. Also, not every investor is able to invest in hedge funds.

Because of the lax regulation, hedge funds are not limited to trading stocks and bonds. Hedge funds can use leverage, or debt, to their advantage in hope of achieving even greater gains with their portfolios. We saw many funds go under in 2008 because of the debt they had taken on. Hedge funds are almost limitless when it comes to what investment vehicles they can place in their portfolio.

Hedge funds can also trade derivatives, which are contracts to buy/sell stocks at a certain price in the future.

Hedge funds cannot invest money from the public, therefore, the funds are very unregulated. You have to meet certain characteristics in order to be able to put your money in a hedge fund. One of the most common requirements is that all investors must have a net worth of $1 million, which can not include their primary residence. This means the funds can take on short positions in the market, or are essentially able to bet against the market.

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