Hedge fund definition

Hedge funds are investment partnerships that use pooled funds, and sometimes borrowings, to try and generate significant returns for their investors. The funds use an array of investment strategies to try and earn an active return known as alpha. Hedge fund managers are generally very sophisticated investors who will often use leverage and derivatives to try and bolster returns, while investors in the funds are accredited or qualified wealthy institutions or individuals who are required to keep their money in the fund for a minimum amount of time.

Hedge funds differ from mutual funds in that they can invest in almost anything (as long as they disclose their strategy beforehand to their investors) and their fee structure includes a performance fee as well as an expense ratio. Traditionally, hedge funds have faced less regulation than mutual funds, although they are facing heightened scrutiny in the wake of the financial crisis.

Hedging is an investment technique that attempts to reduce risk, but hedge funds are focused on achieving the best possible returns for their investors and some of the more speculative investments they make, can actually carry greater risk.