Hedge Fund
A hedge fund is a private investment partnership using sophisticated strategies like leverage, short selling, and derivatives to generate returns for accredited investors, typically with high minimum investments and limited liquidity.
🎬 Video Explanation
Exam Tip
Hedge-fund structures restrict eligibility. Accredited-investor and qualified-purchaser criteria differ. Fees and redemption limits vary by fund.
What is a Hedge Fund?
A hedge fund is a pooled investment vehicle that uses various strategies to generate returns. Unlike mutual funds, hedge funds face fewer regulations and can employ aggressive strategies, but access generally requires accredited-investor or qualified-purchaser status, depending on the structure.
Key Characteristics
| Feature | Description |
|---|---|
| Structure | Private limited partnership |
| Investors | Accredited investors, institutions |
| Minimum Investment | Often $250,000 - $1 million+ |
| Regulation | Less regulated than mutual funds |
| Liquidity | Limited (lock-up periods) |
Common Strategies
| Strategy | Description |
|---|---|
| Long/Short Equity | Buy undervalued stocks, short overvalued |
| Global Macro | Bet on economic/political trends |
| Event-Driven | Trade around mergers, bankruptcies |
| Arbitrage | Exploit price differences |
Fee Structure ("2 and 20")
| Fee Type | Typical Amount |
|---|---|
| Management Fee | 2% of assets annually |
| Performance Fee | 20% of profits |
| High Water Mark | No performance fee until prior losses recovered |
Hedge Fund vs. Mutual Fund
| Factor | Hedge Fund | Mutual Fund |
|---|---|---|
| Regulation | Less regulated | SEC regulated |
| Investor Type | Eligible sophisticated investors, often accredited investors or qualified purchasers | Retail investors can generally participate |
| Minimum | $250K+ | Often $1,000 |
| Liquidity | Lock-up periods | Daily redemption |
| Fees | Higher (2 and 20) | Lower |
Accredited Investor Requirements
| Criterion | Requirement |
|---|---|
| Income | $200K individual (must exceed the threshold) / $300K joint (must exceed the threshold); income test applies to the prior two years and expected current year |
| Net Worth | $1 million (must exceed the threshold; primary residence excluded) |
Exam Alert
Hedge fund eligibility depends on the structure; accredited-investor or qualified-purchaser standards commonly apply. Know the "2 and 20" fee structure. They can use leverage, short selling, and derivatives. Less regulated than mutual funds.
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Mutual Fund
A mutual fund is a professionally managed investment vehicle that pools money from multiple investors to purchase a diversified portfolio of securities.
Private Placement
A private placement is the sale of securities directly to a limited number of sophisticated investors without a public offering, typically exempt from SEC registration under Regulation D.
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