| It is difficult to provide a general definition of a | | | | investment companies and are heavily regulated. |
| hedge fund. Initially, hedge funds would sell short | | | | Hedge funds, as private funds, have far fewer |
| the stock market, thus providing a "hedge" | | | | restrictions and regulations. |
| against any stock market declines. Today the | | | | 2. Mutual fund companies invest their client's |
| term is applied more broadly to any type of | | | | money, while hedge funds invest their client's |
| private investment partnership. There are | | | | money and their own money in the underlying |
| thousands of different hedge funds globally. Their | | | | investments. |
| primary objective is to make lots of money, and | | | | 3. Hedge funds charge a performance bonus: |
| to make money by investing in all sorts of | | | | usually 20 percent of all the gains above a certain |
| different investments and investments strategies. | | | | hurdle rate, which is in line with equity market |
| Most of these strategies are more aggressive | | | | returns. Some hedge funds have been able to |
| than than the investments made by mutual funds. | | | | generate annual rates of return of 50 percent or |
| A hedge fund is thus a private investment fund, | | | | more, even during difficult market environments. |
| which invests in a variety of different | | | | 4. Mutual funds have disclosure and other |
| investments. The general partner chooses the | | | | requirements that prohibit a fund from investing in |
| different investments and also handles all of the | | | | derivative products, using leverage, short selling, |
| trading activity and day-to-day operations of the | | | | taking too large a position in one investment, or |
| fund. The investor or the limited partners invest | | | | investing in commodities. Hedge funds are free to |
| most of the money and participate in the gains of | | | | invest however they wish. |
| the fund. The general manager usually charges a | | | | 5. Hedge funds are not permitted to solicit |
| small management fee and a large incentive bonus | | | | investments, which is likely why you hear very |
| if they earn a high rate of return. | | | | little about these funds. During the previous five |
| While this may sound a lot like a mutual fund, | | | | years some of these funds have doubled, tripled, |
| there are major differences between mutual fund | | | | quadrupled in value or more. However, hedge |
| and hedge fund: | | | | funds do incur large risks and just as many funds |
| 1. Mutual funds are operated by mutual fund or | | | | have disappeared after losing big. |