Before you can understand Hedge fund, you have to first of all know what Mutual Fund is.
Mutual fund is an investment programme funded by shareholders that trades in diversified holdings and is professionally managed.
By diversified holdings, I am referring to a mix of Paper Asset investments such as Stocks, Shares, Bonds etc.
It is a pull of investment fund that includes money from many retail or institutional investors and is used to purchase securities.
Hedge funds is different from mutual funds in that they cannot be sold to the general public and are subject to a different set of regulations.
Only sophisticated and accredited investors are allowed to use hedge funds.
Besides the fact that they are open to a limited number of accredited investors, hedge funds require a larger initial minimum investment compared to mutual funds.
Also, they are illiquid. That means investments cannot be withdrawn for a long period of time known as lock up period which could be a year.
A key characteristics of Hedge funds is that it has a wider investment latitude than other investments. It can be used for anything ranging from real estate, stocks, equities and other derivatives. Whereas mutual funds are used only for stocks and bonds.
Another difference is that unlike mutual funds that charge fixed fees despite the performance of the investment, the managers of hedge funds only charge their fees based on a percentage of the investment returns.
Overall, hedge funds carry the most risk in the market because their managers make lots of speculative investment.
Also, their use of use of leverage, or borrowed money, can turn what would have been a minor loss into a significant loss.
There are many other interesting characteristics, advantages and risks associated with hedge funds, but for the sake of time and so that I won’t bore you 😃.
You can find out more about the fund through this article by Barclay Hedge.
Hedge funds is only one of many investment vehicles which I intend to treat on this Forum sometime in future, maybe from July.
Investment is a very wide topic which we need to take time to break it down into many segments so we can thoroughly understand it.