A hedge fund is private investment fund or pool that trades and invests in various assets such as securities, commodities, currency, and derivatives on behalf of its clients, typically high net worth individuals and institutions.
In order to invest in a hedge fund you need to meet requirements set by the Securities and Exchange Commission. You must have a net worth of at least $1 million or an annual income of $200,000 or $300,000 if you are married. Most parties involved in hedge fund investing are institutional – groups such as pension funds and foundations.
A hedge fund is a lightly regulated investment partnership that invests in a variety of assets with the aim of maximizing returns are minimizing risk – hedging refers to limiting risk and hence the name. Hedge Funds are run with very little regulation from the SEC. This is due to the fact that only Accredited or Qualified Investors are able to participate. Regulators are less strict with high net worth individuals or institutions because they feel that they are likely to be better informed on the risk involved and can better afford to lose money in an adverse situation than the average investor.
In order to see the offering documents or learn more about the investment style of a hedge fund you are required to prove your qualified status. Hedge funds tend to avoid websites and tradition forms of marketing to avoid the appearance of marketing to unqualified investors. Funds often aquire new investors through consultants.
Types of Hedge Fund
Absolute Return Funds are ideal for investors with a lower risk tolerance.
Directional Funds are suitable for more aggressive investors, willing to assume greater risk for higher potential returns.