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A hedge fund is a type of investment fund that pools money from investors and invests it in securities or other types of investments with the goal of generating positive returns.
Hedge funds are managed by professional fund managers who use a wide range of strategies, including leveraging or trading of non-traditional assets, to earn above-average investment returns.
Unlike mutual funds, hedge funds typically limit opportunities to redeem shares and often impose a locked period of one year before shares can be cashed in.
Hedge funds are considered alternative investments and are generally restricted to institutional investors, high net worth individuals, and accredited investors.
How do hedge funds differ from mutual funds
Hedge funds differ from mutual funds in several ways. Mutual funds are regulated investment products offered to the public and available for daily trading, while hedge funds are private investments that are only available to accredited investors.
Hedge funds are known for using higher risk investing strategies with the goal of achieving higher returns for their investors. Hedge funds are typically more aggressive than mutual funds, and while investment strategies differ from fund to fund, hedge funds typically aim to generate higher returns than mutual funds.
Hedge funds are subject to less regulatory oversight than mutual funds and are generally restricted to institutional investors, high net worth individuals, and accredited investors.
Mutual fund investors can redeem their units on any given business day, while hedge funds typically limit opportunities to redeem shares and often impose a locked period of one year before shares can be cashed in.
What are the typical investment strategies used by hedge funds
Hedge funds employ various investment strategies to generate active returns for their investors. These strategies range from long/short equity to market neutral, merger arbitrage, convertible arbitrage, event-driven, credit, fixed-income arbitrage, and macro.
Long/short equity is a strategy that involves buying undervalued stocks and shorting overvalued stocks, while market neutral involves taking long and short positions in equal amounts to hedge against market risk. Merger arbitrage is a kind of event-driven strategy that involves investing in companies that are involved in mergers and acquisitions.
Convertible arbitrage involves buying convertible bonds and shorting the underlying stock to hedge against risk. Credit strategies involve investing in corporate bonds, while fixed-income arbitrage involves exploiting price differences between related fixed-income securities. Macro funds take big directional bets on global macroeconomic trends.
Hedge funds typically have more flexible investment strategies than mutual funds and often use leverage, short-selling, and other speculative investment practices that are not often used by mutual funds.