Hedge funds are private investment funds known for their lightly regulated nature, use of leverage and short-selling, structural flexibility, and varied investment mandates. Hedge funds are also characterized by the expectation of significant co-investment from the fund’s management team as well as the use of performance-based fee structures.
Although not all hedge funds utilize hedging strategies, hedge funds are able to play both sides of the market (long and short) and therefore should typically exhibit lower correlation to the broader market than a mutual fund or other “long only” investment vehicle. While it is generally agreed that the first hedge fund was started in 1949 by A.W. Jones, the term hedge fund has been used to describe almost any private investment vehicle, exempt from registration as an investment company, that employs proprietary investment strategies to leverage the expertise of the fund’s manager.
Unlike mutual funds, hedge funds must generally only accept “accredited investors,” as that term is defined by the Securities Act of 1933, a restriction that results from a hedge fund’s privately offered status. Common investment strategies utilized by hedge funds include long/short equity, risk arbitrage, event-driven arbitrage, market neutral, short-bias, emerging markets, and managed futures investing.