What Is a Hedge Fund?

A hedge fund is basically an actively managed pool of investment funds that boasts a wider variety of financial assets than most mutual funds out there.

Hedge funds, explained

The hedge fund industry became popularized in the 1990s and has, since, grown exponentially. Today, there are more than $3.25 trillion in total assets under management (AUM), according to the 2019 Preqin Global Hedge Fund Report. So hedge funds are kind of a big deal.

According to the US Securities and Exchange Commission’s (SEC) Office of Investor Education and Advocacy, “hedge funds pool investors’ money and invest the money in an effort to make a positive return.” While hedge funds and mutual funds share a number of similarities, hedge funds are typically more aggressive and riskier than mutual funds. This is largely because they have the ability to invest capital anywhere in the market via all sorts of strategies.

A hedge fund consists of two parties: the professional fund manager, known as the general partner, and the investors, who may sometimes be called the limited partners. Both parties pool their money into the fund together. From there, the hedge fund managers leverage a gamut of sophisticated strategies, complex trading moves and risk-management techniques to attempt to beat average returns on investment for their clients. In an effort to seek profit across markets, they may buy with borrowed money, short-sell stocks, make use of derivatives, and more.

Note, however, that not all hedge funds are created equal. Some are well-diversified, while others are acutely concentrated or use just one strategy. As such, some are riskier than others with higher potential returns than others.

How do hedge funds make money?

First things first, hedge fund managers charge management fees to cover the overhead of, well, managing the hedge fund. This fee is a percentage of the assets under management. It typically sits somewhere around two percent.

Beyond the management fee, hedge funds also have performance fees, which may vary from fund to fund. They are calculated as a percentage, as well. But, this time, the fee is a percentage of the profits from investing. It is generally around 20 percent of the performance above a specific threshold.

What this means for you

Hedge funds aren’t generally available for everybody. Most typical retail investors do not have access to hedge funds. This is because you must be an accredited investor to do it. More specifically, you need to meet a minimum income or have enough in assets to qualify to invest in hedge funds.

Generally, the types of investors who invest in hedge funds are high-net-worth individuals, very wealthy folks and institutional investors like insurance companies and pensions. After all, hedge funds are not regulated in the same ways that protect individual investors, though they are subject to the same prohibitions to protect against fraud. Some are not even obliged to register or file public reports with the SEC.

Q.ai is considered a hedge fund in your pocket because it grants everyday investors access to the same sophisticated strategies that the elite have been using all along.

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