Hedge fund

A hedge fund is a pooled investment fund that holds liquid assets and that makes use of complex trading and risk management techniques to improve investment performance and insulate returns from market risk. Among these portfolio techniques are short selling and the use of leverage and derivative instruments.[1] In the United States, financial regulations require that hedge funds be marketed only to institutional investors and high-net-worth individuals.

Hedge funds are considered alternative investments. Their ability to use leverage and more complex investment techniques distinguishes them from regulated investment funds available to the retail market, commonly known as mutual funds and ETFs. They are also considered distinct from private equity funds and other similar closed-end funds as hedge funds generally invest in relatively liquid assets and are usually open-ended. This means they typically allow investors to invest and withdraw capital periodically based on the fund's net asset value, whereas private-equity funds generally invest in illiquid assets and return capital only after a number of years.[2][3] Other than a fund's regulatory status, there are no formal or fixed definitions of fund types, and so there are different views of what can constitute a "hedge fund".

Although hedge funds are not subject to the many restrictions applicable to regulated funds, regulations were passed in the United States and Europe following the financial crisis of 2007–2008 with the intention of increasing government oversight of hedge funds and eliminating certain regulatory gaps.[4] While most modern hedge funds are able to employ a wide variety of financial instruments and risk management techniques,[5] they can be very different from each other with respect to their strategies, risks, volatility and expected return profile. It is common for hedge fund investment strategies to aim to achieve a positive return on investment regardless of whether markets are rising or falling ("absolute return"). Hedge funds can be considered risky investments; the expected returns of some hedge fund strategies are less volatile than those of retail funds with high exposure to stock markets because of the use of hedging techniques. Research in 2015 showed that hedge fund activism can have significant real effects on target firms, including improvements in productivity and efficient reallocation of corporate assets. Moreover, these interventions often lead to increased labor productivity, although the benefits may not fully accrue to workers in terms of increased wages or work hours.[6]

A hedge fund usually pays its investment manager a management fee (typically, 2% per annum of the net asset value of the fund) and a performance fee (typically, 20% of the increase in the fund's net asset value during a year).[1] Hedge funds have existed for many decades and have become increasingly popular. They have now grown to be a substantial portion of the asset management industry,[7] with assets totaling around $3.8 trillion as of 2021.[8]

  1. ^ a b Cite error: The named reference Lins was invoked but never defined (see the help page).
  2. ^ "Alternative Funds Are Not Your Typical Mutual Funds". finra.org. Financial Industry Regulatory Authority. 11 June 2013. Archived from the original on 14 May 2014. Retrieved 16 April 2014.
  3. ^ Stowell, David (2012). Investment Banks, Hedge Funds, and Private Equity. Academic Press. p. 237. ISBN 978-0-12-404632-0. Archived from the original on 9 August 2016. Retrieved 18 April 2014.
  4. ^ Ismail, Netty (21 February 2011). "Institutions Damp Hedge Fund 'Startup Spirit,' Citi's Roe Says". Bloomberg Businessweek. Archived from the original on 25 February 2011. Retrieved 9 January 2015.
  5. ^ The President's Working Group on Financial Markets (April 1999). "Hedge Funds, Leverage, and the Lessons of Long-Term Capital Management" (PDF). U.S. Department of the Treasury. Archived (PDF) from the original on 7 October 2013. Retrieved 27 September 2013.
  6. ^ Alon, Brav; Wei, Jiang; Hyunseob, Kim (2015). "The Real Effects of Hedge Fund Activism: Productivity, Asset Allocation, and Labor Outcomes". The Review of Financial Studies. 28 (10): 2723–2769. doi:10.1093/rfs/hhv037.
  7. ^ Lemke, Lins, Hoenig & Rube, Hedge Funds and Other Private Funds: Regulation and Compliance (Thomson West, 2014 ed.)
  8. ^ "Hedge fund assets hit record $3.8 trillion in first quarter". Reuters. 21 April 2021. Archived from the original on 5 August 2021. Retrieved 5 August 2021.