Definition
The term hedge fund refers to an investment and business structure that pools capital from individuals and invests in a variety of securities. The objective of a hedge fund is to provide investors with above average returns by assuming above average risk.
Explanation
While a hedge fund can resemble a mutual fund, there are several differences. For example, a hedge fund manager is compensated in two ways: a fixed component which is a percentage of the assets, and a variable component which is based on the performance of the fund. The minimum required investments for hedge funds can also be relatively high, thereby limiting investor participation to high net worth individuals (net assets in excess of $1 million). Most funds also discourage turnover by specifying a lock-up period, which prohibits investors from removing money from the fund.
As is the case with mutual funds, hedge funds will have an assortment of investment strategies. While the term "hedge" originally referred to the fund manager's attempt to reduce risk, most funds today focus on maximizing their investors' return. Strategies employed by hedge funds include convertible arbitrage, distressed securities, emerging markets, equity markets, equity long, equity short, fixed income arbitrage, fund of funds, global markets, option arbitrage, merger arbitrage, and statistical arbitrage.
Related Terms
The term aggressive growth fund refers to a portfolio of securities that attempts to maximize capital appreciation. There is a risk-reward trade off when investing in an aggressive growth fund; the greater returns associated with these funds means the investor is willing to accept more risk too.
Moneyzine EditorJanuary 4th, 2024- The term value fund refers to a portfolio of stocks that are deemed to be undervalued by the market. The objective of a value fund includes not only providing investors with capital appreciation, but also a steady stream of dividends.Moneyzine EditorSeptember 21st, 2023
The term blend fund refers to a portfolio of securities that include both growth stocks as well as equities deemed to be undervalued by the market. The objective of a blend fund is to provide investors with higher than average capital appreciation.Moneyzine EditorJanuary 8th, 2024- The term vulture fund refers to a portfolio of investments that specialize in holding the securities of financially distressed organizations. Vulture funds provide their investors with higher than average yields by purchasing securities at depressed prices.Moneyzine EditorSeptember 21st, 2023
The term growth fund refers to a portfolio of stocks that are expected to provide above average earnings or revenue growth. The same equities that provide growth funds with the potential for higher than average returns will also have above average risk.Moneyzine EditorJanuary 19th, 2024
The term family of funds refers to the range of mutual funds offered by a single management company. Typically, a company's family of funds will provide individuals with the ability to select from a wide array of investment objectives.Moneyzine EditorJanuary 17th, 2024
