What is a Hedge Fund?

From Wikipedia, the free encyclopedia

The term "hedge fund" dates back to the first such fund founded by Alfred Winslow Jones in 1949. Jones' innovation was to sell short some stocks while buying others, thus some of the market risk was hedged. While most of today's hedge funds still trade stocks both long and short, many do not trade stocks at all and the term hedge fund has come to mean a relatively unregulated investment fund, often a partnership rather than a corporation in form, and characterized by unconventional strategies (i.e., strategies other than investing long only in bonds, equities or money markets).

For U.S.-based managers and investors, hedge funds are simply structured as limited partnerships. The hedge fund manager is the general partner and the investors are the limited partners. The funds are pooled together in the partnership and the general partner (hedge fund manager) makes all the investment decisions based on the strategy the hedge fund manager has outlined in their offering documents. In return for managing these funds, the hedge fund manager will receive a management fee and an incentive fee.