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.
Exam Tip
Hedge funds = accredited investors only. "2 and 20" = 2% management + 20% performance. Can use leverage and short selling.
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 they're limited to accredited investors.
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 | Accredited only | Anyone |
| 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 / $300K+ joint |
| Net Worth | $1 million+ (excluding primary residence) |
Exam Alert
Hedge funds are for ACCREDITED investors only. Know the "2 and 20" fee structure. They can use leverage, short selling, and derivatives. Less regulated than mutual funds.
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Related Terms
Mutual Fund
SecuritiesA mutual fund is a professionally managed investment vehicle that pools money from multiple investors to purchase a diversified portfolio of securities.
Private Placement
SecuritiesA 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.