What is a hedge fund? by Joe Healey

The term “hedge fund” is used liberally these days, but not every person who encounters it is going to know exactly what it means. The ins and outs of hedge funds can be complicated, but simply put they are investment funds with a wider variety of options than many other types of investment funds, such as mutual funds. For example, mutual funds will deal primarily in one “area,” such as buying stocks and bonds, but hedge funds have a far wider reach than just buying and selling stocks. Think of a hedge fund as an entire investment portfolio; money invested in the fund may be used for many different purposes.

Hedge funds are mostly unregulated to give the investor more freedom, and they are typically geared to maximize the investor’s return profit. Because of their less specified and unregulated nature, hedge funds often deal with large amounts of money, and in turn can be quite risky if there is a bad investment decision made.Many different strategies are used in tandem in order to see a profitable return on the hedge fund investments.

Another defining characteristic that tends to set hedge funds apart from other investment types is the fact that they are usually private investments that are entered into as a limited partnership, or with a limited liability company. One person or company manages the hedge fund, and investors will usually trust the money manager to make sound decisions to put their money to work – for a profit. For example, the money manager may take the amount an investor has put into the hedge fund and decide that it is best suited to opening new businesses, or real estate, stocks, etc. The investor must trust that the money manager is making the best decision for their investment. One of the up sides to hedge funds is that there is almost no limit to investment possibilities.

One of the other reasons the hedge funds are set up in limited liability companies or in partnerships is so that, if the company goes bankrupt, investors cannot go after the company for an amount larger than what they invested into the fund. When dealing with large amounts of money (as hedge funds often do), a failed hedge fund can lead to large debt, and companies want to be sure they are only liable for what they can afford to repay in such a situation.

Of course, the money manager (the partner or company) will be owed a certain amount of the profits made. This can be an incredibly lucrative deal for many investors and companies; there is freedom to make decisions, freedom to take exciting risks, and -- as often seen in the current market – quite a bit of money to invest with. It is in the money manager’s best interests to make the investor big profits in their investments, as well – the more money the hedge fund earns, the bigger the sum the money manager takes home as their percentage of the profits dictates

hedge fund joe healey

hedge fund joseph healey