| HEDGE FUNDS |
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| Alejandro Ochoa J |
| A broad definition of HFs for beginners... In a very broad sense, a Hedge Fund is a fund, usually used by wealthy individuals and institutions, which is allowed to use aggressive strategies that are unavailable to mutual funds, including long/short equity or other securities funds, leverage, program trading, statistical trading, swaps, arbitrage, and derivatives. Hedge Funds are exempt from many of the rules and regulations governing other funds, which allows them to accomplish more aggressive investing goals. They are restricted by law to no more than 100 investors per fund, and as a result most hedge funds set extremely high minimum investment amounts, ranging anywhere from $250,000 to over $1 million. As with traditional mutual funds, investors in hedge funds pay a management fee; however, hedge funds also collect a percentage of the profits (Usually 20%). Source: investorwords.com |
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| ... And a more technical definition A hedge fund can be classified as an alternative investment. Alternative investments are investments other than stocks and bonds. A U.S. hedge fund usually is a U.S. private investment partnership invested primarily in publicly traded securities or financial derivatives. Because they are private investment partnerships, the SEC limits U.S. hedge funds to 99 investors, at least 65 of whom must be accredited. An accredited investor is defined as an investor having a net worth of at least $1 million. A relatively recent change in the law (section 3(c)7) allows certain funds to accept up to 500 qualified purchasers. In order to be able to invest in such a fund, the investor must be an individual with at least $5 million in investments or an entity with at least $25 million in investments. The General Partner of the fund usually receives 20% of the profits, in addition to a fixed management fee, usually 1% of the assets under management. The majority of hedge funds employ some form of hedging -- whether shorting stocks, utilizing puts, or other devices. Offshore hedge funds usually are mutual fund companies that are domiciled in tax havens, such as Bermuda, and that can use hedging techniques to reduce risk. They have no legal limits on numbers of non-U.S. investors. Many accept U.S. investors, although usually only tax-exempt U.S. investors. For the purposes of U.S. investors, these funds are subject to the same legal guidelines as U.S.-based investment partnerships; i.e., 99 U.S. investors, etc. One can find a plethora of Hedge funds. Over the years, many investors have assumed that hedge funds were all like the famous Soros or Julian Robertson's Tiger funds - with high returns, but also with a lot of volatility. In fact, only a small percentage of all hedge funds are macro funds of that type. Amongst the others, there are many that strive for very steady, better-than-market returns. Source: www.hedgefund.com |