What is a Hedge Fund?

A hedge fund is an investment fund with a large, unregulated, pool of capital available to a limited number of investors.

A hedge fund is permitted by regulators to undertake a wider range of investment and trading activities than other investment funds, and pays a performance fee to its investment manager. Each fund has its own strategy which determines the type of investments and the methods of investment it undertakes. Hedge funds, as a class, invest in a broad range of investments including shares, debt, commodities and so forth.

Hedge funds often seek to offset potential losses in the principal markets they invest in by hedging their investments using a variety of methods, most notably short selling. However, the term "hedge fund" has come to be applied to many funds that do not actually hedge their investments, and in particular to funds using short selling and other "hedging" methods to increase rather than reduce risk, with the expectation of increasing return.

(Short-selling is the sale of shares that the seller does not own at the time of trading. It is a way of profiting from a fall in a company's share price. Most stock market investors buy shares in the hope and expectation that their value will increase, but it is also possible to make money when the opposite happens. Shorting means selling a share that you don't own in order to buy it back once it has fallen in price, netting a profit in the process.)

Hedge funds are typically open only to a limited range of professional or wealthy investors. This provides them with an exemption in many jurisdictions from regulations governing short selling, derivative contracts, leverage, fee structures and the liquidity of interests in the fund. A hedge fund will typically commit itself to a particular investment strategy, investment types and leverage levels via statements in its offering documentation, thereby giving investors some indication of the nature of the fund.

The net asset value of a hedge fund can run into many billions of dollars, and this will usually be multiplied by leverage. Hedge funds dominate certain speciality markets such as trading within derivatives with high-yield ratings and distressed debt.

For more information go to http://en.wikipedia.org/wiki/Hedge_fund

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