A Hedge fund can be referred to as a private investment fund which is formed by collecting money from investors. This fund is then used for buying stocks and bonds. A hedge fund charges a performance fee and it is available only to a limited range of qualified investors. In the United States, it is only the accredited investors who actually enjoy the benefits of hedge funds. In fact, in many countries, hedge funds are not allowed to market to non-accredited investors. Hedge funds are only allowed to regulate retail investment funds such as mutual funds and pension funds. It is for this reason they have limited incentive to reach out their private information to the public.

Hedge funds are unregistered instrument of investment and it involves a big risk factor. Hedge fund is mostly used by institutions and individuals who are wealthy enough and they are allowed to use aggressively decisions. In other words, they can use aggressive strategies which are generally considered to fall into the category of “hedge fund”. Some of them are known as arbitrage strategies, short-term trading strategies, global strategies, relative value – long/short strategies and long/short hedge related strategies. Mostly, hedge funds are managed by former bankers or traditional investment managers who fix up their own funds. They can earn good money by charging high fees. Since hedge funds are unregulated and are risky in nature, the managers prefer to accept investment only from rich people and investors who are sophisticated in nature.

Many people feel that the fees on hedge funds are very high. Hence being fee conscious, they adopt hedge funds slowly. In my opinion, such an attitude is baseless. In the professional field, one must realize that there exist a strong relationship between the quality of performance and the level of compensation. You must know of the fact that you get what you pay. In other words, never underestimate the skills and the quality of the manager who can give you the best for the price that you have paid for. Also one must note that mostly the hedge fund fees are based on profit sharing basis. This rule makes the fees self-adjusting. If there is a decline in the performance, so will the fees be.

The term “hedge” means to manage risk. A money manager who allocates or rather makes an investment that can be described as speculative. On the other hand if this same manager tries to makes an investment specifically for balancing or counter acting a negative performance from his speculative position, then this position would be considered as his hedging position. In the case of Hedge funds, an investor pays the management fee on assets held within the fund. On the other hand, the investors entitled to pay performance fees only after positive performance has been achieved. Hedge funds are funds that use aggressive investing methods such as short selling, investing in derivatives and leverage with the main aim of seeking high returns. Hedge funds enjoy the exemption from many rules and regulation that govern other mutual funds. Thus due to the exemption, hedge funds are allowed to accomplish aggressive investing goals. Hedge funds normally have high minimum investment amounts because they cannot exceed more than 100 investors per fund. This is the restriction imposed as per the law. One must also keep in mind that all hedge funds are not highly aggressive in nature