Oct 15 2010

What is a hedge fund?

Category: Finance

Answer:

A hedge fund is comparable to a mutual fund. They both have specific investment strategies that combine assets from various investors. A hedge fund differs in a few ways though.

  • It is a private investment that is not registered with the SEC.
  • Normally consists of and offered to a limited number of investors.
  • Takes on a wider range of investing and trading activities.
  • Uses leverage, short selling, options, and derivatives as a trading strategy.
  • The fund manager will often receive a percentage based on performance.

A hedge fund will often look to diversify some of the risks involved within their investments by utilizing a number of hedging techniques like short selling, options, and derivatives. Many hedge fund managers will often use these tactics as a trading strategy instead of a hedging technique. Many times these strategies will lead to incredible gains as well as devastating losses.


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