What is a Hedge Fund? Hedge Funds 101

A hedge fund is really just a structure for running an investment program. It’s a business structure, usually a Limited Partnership, that operates like a business. It’s a “private investment partnership”. Its business is investing or trading. There are several good reasons for operating an investment program in a private investment partnership structure. For example, a global macro manager may have an edge constructing exposure to markets with options. Rather than risking money buying stock or a currency, we may gain a better risk/reward through a vertical spread. Many strategies are difficult to execute across multiple accounts, so they can’t effectively and efficiently be offered as separately managed accounts, so the LP structure is the better choice. And, even though some strategies can be implemented in a mutual fund, a mutual fund is far more expensive to operate and administer to make them available to the general public. So if a manager aims to only offer a strategy to a fewer number of investors, he ends up managing what is commonly called a  “hedge fund”.  There are all kinds of strategies operated in that format, so it’s really just industry jargon. The term “hedge fund” is just slang for a “private investment partnership that isn’t offered to everyone”. Beyond that, here is a great primer for hedge funds:

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  1. Pingback: Hedge funds charging highest performance fees provide best returns « Asymmetry Observations

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