This is a pooled investment fund where a group of people contribute money, and the total funds are invested with returns to be distributed. Shares in the fund can also be bought and sold.
In these senses, it’s no different from a mutual fund. But there are some key differences:
- Mutual funds are publicly-traded. Anyone can buy and sell shares in one on exchanges. They’re often advertised on television and in magazines. Hedge funds are private. They are not traded on exchanges, and there are more restrictions on redeeming your shares for cash.
- Hedge funds have access to types of investments that are disallowed to mutual funds. This means that hedge funds generally embrace more risk and are managed more aggressively to provide higher returns.
- Consequently to the last item, hedge funds are regulated so that only certain people can participate. You have to be an “accredited investor” to buy into a hedge fund, which means you are certified to purchase unregistered securities due to your net worth, portfolio size, or investment experience.
Hedge funds have become the “glamour” investment vehicle in the last 20 years. Due to their ability to be managed aggressively, they can provide stellar returns. Hedge fund managers often receive stunning commissions on the increase in portfolio value, sometimes amounting to the high nine figures.
The title of “hedge fund manager” has become an archetype and stereotype. Due to their income level and their freedom to be daring in their investment decisions, hedge fund managers have seemingly replaced “CEO” as the most coveted title in finance.
Why I Looked It Up
I’ve run across this word for years but never understood how it was any different from a mutual fund.