A hedge fund is a privately pooled investment vehicle that uses aggressive, flexible strategies — long and short, leverage, derivatives — to chase returns for a small group of wealthy, accredited investors.
A hedge fund is an actively managed investment fund that pools money from a limited number of accredited (wealthy) investors and institutions, then deploys it using strategies far more aggressive than a typical mutual fund is allowed to use. The name comes from the original idea of “hedging” — holding offsetting long and short positions so the fund could profit whether the market rose or fell.
Unlike a fund that just buys and holds, a hedge fund can go long (betting prices rise) and short (betting prices fall) at the same time, use leverage to amplify positions, and trade options, futures and other derivatives. Common styles include long/short equity, global macro, event-driven, and arbitrage.
Hedge funds are expensive. The classic structure is 2 and 20: a 2% annual management fee on assets plus a 20% performance fee on profits. Those fees are a high hurdle — the fund must beat the market by a wide margin just to leave investors ahead of a cheap index fund.
A mutual fund is open to everyone, heavily regulated, fully transparent, and usually long-only. A hedge fund is private, lightly regulated, secretive about its positions, can short and use leverage, and is restricted to accredited investors who can afford the risk. An index fund sits at the opposite end — cheap, passive and simple.
Feel the long/short idea: hedge funds profit on the way down too. Practice the short side risk-free in the short selling game and combine it with the stock market simulator.
Not advice: educational content only. For authoritative basics see the SEC at investor.gov.
Related: what is an index fund, leverage in trading, and margin trading.
A hedge fund is a private pool of money from wealthy investors that a manager invests using flexible, aggressive strategies — going both long and short, using leverage and derivatives — to try to earn returns in any market.
It is the classic hedge fund fee structure: a 2% annual management fee on the assets plus a 20% performance fee on the profits the fund earns.
A mutual fund is open to everyone, regulated and usually long-only. A hedge fund is private, lightly regulated, restricted to accredited investors, and can short stocks and use leverage.
They can be. Leverage and concentrated bets magnify both gains and losses, fees are high, and money is often locked up. Many hedge funds also fail to beat a simple low-cost index fund over time.