Uncovering funds: What is a hedge fund?

Julie Brownlee, Fsp Invest, 08 Sep. 2015

Tags: hedge fund, what is a hedge fund, hedge fund fees, investing in hedge funds, funds,

You’ve no doubt come across the term hedge fund at some stage.

So what is a hedge fund?

Read on to find out…

The ins and outs of a hedge fund

If you look for the definition of a hedge fund online, there are some differences in definition. Broadly speaking a hedge fund describes any private investment vehicle that invests money pooled from wealthy individuals and institutions.

A professional fund manager invests the money from the hedge fund, in much the same way as a manager of a unit trust would. Generally, hedge funds aren’t offered directly to the general public to invest in, the experts at Money Week explain.

The name ‘hedge fund’ originates back to the 1950s. At this time it was the name given to funds that employed some element of hedging. For example, investing in stocks and shorting the wider market.

But today, a hedge fund includes much more than this. These funds now use a huge number of different strategies and investments. And hedging may not necessarily feature in some funds at all.

The costs and fees of hedge funds

In comparison to other managed funds, like unit trusts, hedge funds have high fees. The industry standard for fees is “two and twenty”.

What this means is there is a 2% annual management fee, plus 20% of profits. But for very successful hedge funds, these funds can be higher.

The managers of hedge funds account for these high fees due to the superior returns these funds claim to deliver. But statistics say otherwise.

For example, the HFRX Global Hedge Fund Index hasn’t done as well as a balanced portfolio of the world’s shares and bonds over the past decade.

So there you have it. What a hedge fund is.

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