A hedge fund is a pooled investment vehicle that may invest in a diverse range of markets and use a wide variety of investment styles and financial instruments to accomplish their goals. This investment flexibility, both in terms of strategies and financial instruments, unlocks unique opportunities for clients.
The term “hedge fund,” which has now become part of modern culture, refers to the “hedging techniques” that have been traditionally used in this approach. The name is mostly historical as the first hedge funds attempted to hedge against potential downside risk by shorting the market or individual securities (e.g., mutual funds generally do not enter into short positions as one of their primary tools). Today, hedge funds use dozens of different strategies with the aim of achieving performance through skill or security selection (i.e., alpha) as opposed to market direction (i.e., beta).
Hedge funds are generally available only to qualified investors and cannot be offered or sold to the general public. A hedge fund’s value is calculated, much like a mutual fund, as a share of the fund’s net asset value, meaning that increases and decreases in the value of the fund’s investment assets (and fund expenses) are directly reflected in the amount an investor can later withdraw.
Because hedge funds are typically not sold to the general public, the funds and their managers have historically been exempt from some of the regulations that encumber other funds and investment managers with regard to how the fund may be structured and how strategies and techniques are employed.