The Basics Of Hedge Funds By Desiree' Harris At Isnare.com Ezine Articles

The hedge fund definition is an investment company that uses high-risk techniques, such as borrowing money and selling short, in an effort to make extraordinary capital gains. Hedge funds are similar to mutual funds in that investments are pooled together and managed by a professional, but other than that, the funds are two completely different animals.

Hedge funds are mostly unregulated which means that there are no set rules that the fund has to follow, unlike mutual funds. The reason for this is because in order to invest in hedge funds, you have to be accredited or qualified in certain ways. US law requires that most investors in the hedge fund have a large amount of investment knowledge, a net worth of at least $1 million and a certain amount of income per year.

Hedge funds are not limited to any one kind of investment. They invest in many different markets using unconventional strategies, they can hold long or short positions, and can use leverage and derivatives. Profit can be made in virtually any environment and for the most part managers attempt to “hedge” risk. Most investments made by hedge funds are speculative, so the risks tend to be high.

Managers of hedge funds receive a management fee and a performance fee in return for managing the funds. The management fee is typically 1%-2% of the funds assets and the performance fee is normally about 20% of the profits made that year. With assets of some hedge funds being in the upper hundred million to the few billion dollar range, and with profits or gains beating the S&P 500 on average, hedge fund managers have to potential to be very rich. Hedge fund managing is one of the highest paying careers, and several managers are featured on Forbes Richest List. A top manager actually made about $1.5 billion dollars in 2005.

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