What is a hedge fund? A hedge fund is a private investment portfolio that makes aggressive speculative investments. Because hedge funds often have a very high minimum investment requirement, hedge fund investors are typically only institutional investors and wealthy individuals. The hedge fund manager manages the hedge fund investments. Because hedge funds are private – often structured as private partnerships – they are not subject to the same SEC regulations as other funds, such as mutual funds.
Hedge fund investing is fairly illiquid. This is because hedge funds often require investors to commit their invested capital for a certain period of time, sometimes a year or longer. During this period the investor’s capital is locked into the hedge fund. Therefore, the investor cannot pull out the invested funds. Hedge funds often require investors to lock in their funds so the hedge fund manager can engage in complicated investments without worrying about having the capital pulled out from under him.
The costs of hedge funds include management fees and a percentage of any profit that goes to the hedge fund manager. Call this percentage of profit that goes to the hedge fund manager the hedge fund carry. Hedge fund investments often include combinations of exotic financial instruments, such as credit default swaps, leverage, options contracts, forward contracts, futures contracts, long positions, short positions, and other financial derivatives.
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