A hedge fund is a privately managed investment fund that pools money from professional or wealthy investors and invests it using flexible and often complex strategies. Unlike traditional mutual funds, hedge funds have fewer regulatory restrictions and can use a wide range of financial instruments.
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Hedge funds aim to generate positive returns in both rising and falling markets.
Hedge funds may invest in stocks, bonds, currencies, derivatives, commodities, and other assets. They often use techniques such as leverage, short selling, and derivatives to increase potential returns or reduce risk. The term “hedge” originally referred to strategies designed to offset market risk, but many hedge funds today focus on maximizing returns rather than simply reducing volatility. Because of their flexibility, hedge funds can pursue aggressive strategies that may lead to higher profits but also higher risks.
They typically charge a management fee and a performance fee, meaning managers earn a percentage of profits. Hedge funds are usually only accessible to accredited or institutional investors due to their risk profile and investment structure.
Short example:
Suppose a hedge fund believes that technology stocks will rise but certain retail stocks will fall.
The fund buys shares in selected technology companies and at the same time sells retail stocks short.
If technology stocks increase in value and retail stocks decline, the fund can profit from both positions, even if the overall market remains flat.
Disclaimer: Investing brings risks. Our analysts are not financial advisors. Always consult an advisor when making financial decisions. The information and tips provided on this website are based on our analysts' own insights and experiences. Therefore, they are for educational purposes only.