Hedge Funds

A hedge fund is a fund that tries to achieve a positive return for its investors, even when market returns are negative. Hedge funds are similar to a mutual fund in that they pool investors’ money and invest it into securities, but they usually try to avoid classification as a mutual fund so that they are not subject to the restrictions placed on mutual funds. Hedge funds avoid being called mutual funds by limiting the number of investors to under 100 or by selling to only qualified purchasers. Qualified purchasers are individuals with more than $5 million and institutions with more than $25 million.

Hedge funds also differ from mutual funds in that they usually rely on broader investment strategies, such as investing in derivatives to hedge risk and increase leverage. Hedge funds often invest in more long-term, less-liquid investments than mutual funds. For all these reasons, hedge funds tend to be riskier than other investment vehicles and, thus, may face high returns and high losses. Because of their increased risk and illiquid nature, hedge funds a