A hedge fund is an investment vehicle open only to a limited range of investors. The fund invests in stocks, commodities, and debt, amongst other types of investments. It is characterized by a wider range of trading and investment activities and traditional long-only investment funds. These funds seek to hedge some risk associated with their investments using short selling and derivatives methods, like buying and flipping debt.
Hedge funds are usually open to limited wealthy or professional investors who meet criteria established by regulators. In exchange, the funds are exempt from regulations that pertain to ordinary investment funds. Practices of short selling, fee structures, liquidity of fund interests, and using leverage and derivatives are typically unregulated. These funds feature a performance fee that is payable to the fund investment manager.
Some analysts believe that hedge funds are overrated, or even worse, fraudulent. They claim that these funds attract individuals who unable to manage their own money. The feel that managers should be wary about which fund of funds they deal with because many of the allocations are made by those engaged in marketing and a hand-shake network.
Hedge fund managers tend to resent the investors who provide them with needed capital. These individuals will not hesitate to tell the fund manager how to invest their money. However, this is not always the case and fund managers can often find clients they enjoy working with and for in the industry.
Many will remember the Bernie Madoff incident, where Mr. Madoff’s investment group ran a fraudulent hedge fund. Quite a few people lost a lot of money to this scammer and they are still feeling the effects. Wise investors will take time to research the returns posted by a hedge fund in order to identify discrepancies or anything that appears unrealistic. If the fund appears too good to be true, it often is.