Since many individuals new to the world of investing are confused about the various terms used in this industry, here as an article that broaches the question, what is a hedge fund? In layman’s terms, a hedge fund is an investment partnership established by a money manager. A hedge fund can be a limited liability company or a limited partnership. Thus if the company falls into bankruptcy the creditors are not able to ask the investors for more money than they have deposited into the hedge fund. In addition, hedge fund investments are illiquid as investors generally are forced to keep their funds in for at least a year, often more.
Hedge fund managers are paid a percentage of the profits they earn on the money the investor has deposited to his/her company. When hedge funds first started out, they were seeking to turn a profit irrespective of if the market went up or down since the managers were able to either buy stocks or short them (make money when a stock plummets). Later on, “hedge fund” became a generic term.
Going a little deeper to answer the question, what is a hedge fund, one finds that it is a group of investments that is managed utilizing advanced investment strategies. Such hedge fund strategies include: short, long and leveraged derivative positions in domestic and international markets in an attempt to get high returns.
Furthermore, the term “hedging” is used to describe what happens when hedge fund managers try to reduce risk. In general though, this is not a common hedge fund strategy since most managers are actually seeking to maximize return on the investment.