A hedge fund is an alternative investment fund. It is perhaps best described by what it is not, rather than what it is. A mutual fund or traditional long only fund might invest in long only stock positions. A Hedge Fund invests in a variety of assets such as FOREX, stock or commodities, often with complex portfolio-construction and risk management techniques employing different strategies to earn active return, or alpha, for their investors. This covers every conceivable investment strategy that may be prohibited by the regulation governing mutual funds.
For a wider list of investment strategies of this type please refer to our article Event Driven Investment Strategies. Because of this, the industry faces less regulation than mutual funds and other investment vehicles. These private investment vehicles are generally secretive about their strategies and reveal minimal information even to clients.
Hedge Fund Clientele
Clients are generally accredited investors or institutional investors whose funds are pooled together. These investors are better placed to understand the risks associated with this type of investing. These institutional investors, such as investment funds, pension funds or insurance companies use the investment strategies of these alternative funds as a way of diversifying their investments. High net worth individuals may also be regular clients of hedge funds.
However, because of the risks involved in some of these strategies, often due to the level of leverage used and the reduced level of regulatory oversight, investments such as these are not deemed suitable for the private investor.
Eptymology
Although the term “hedge fund” may seem like a recent construct, it was in fact first coined in the 1940s. An alternative investor by the name of Alfred Winslow Jones had created a fund that employed shorting stocks as part of its investment strategy.
