Hedge Fund Definition

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What is a Hedge Fund?

A hedge fund is an alternative and often less regulated investment vehicle for large institutional and private investors. They are similar to mutual funds in that they pool together investors’ money and create large portfolios that are valued on their net asset value. However, there are some distinct differences between the two.

The first and perhaps most attractive factor for investors is that such hedge funds are not regulated as closely by the Securities and Exchange Commission (SEC), giving them a lot more investment and risk-taking flexibility.

Secondly, because of this increased freedom, hedge funds can engage in trading activities that are often unavailable to mutual funds. This includes high-risk leveraged positions for both long and short positions or the use of high-frequency trading and other aggressive investment practices. Furthermore, hedge funds invest in less traditional opportunities such as futures contracts or options. These investments in derivative products were a large catalyst behind the 2008 financial crisis.

Hedge funds have lower liquidity because their shares are not publicly traded.  Depending on the “lockup period,” fund investors might have to wait a set period of a month, quarter, or even years to withdraw invested money.

The compensation of management in a hedge fund also sets it far apart from a mutual funds’ fixed fee (regardless of positive or negative performance). A common hedge fund compensation model is known as the 2/20, where the fund management takes 2% of the net asset value plus a 20% share of profits. Because this is a strong incentive for fund managers to take excess risk, the government strictly limits the type of investors who can participate in hedge funds.  This model also leads to incredibly high (even $1 billion-plus) bonuses for these fund managers, a highly controversial issue.

Best 12 Hedge Fund Managers

Top 12 hedge funds

Hedge funds that invest over $100 million in equity are required to submit a form 13f to the SEC within 45 days after the end of each quarter. TipRanks automatically retrieves all these filings from the public EDGAR database and uses algorithms to backtrack performance. You can see the full portfolio and performance of each hedge fund on their respective pages; furthermore, you can browse the top 25 performing hedge funds.