Introduction to Hedge Funds

Hedge funds have received a bit of negative press lately. Here are just some examples from MSN Money (“Billions of dollars in hedge-fund money disappeared into thin air amid the GM mess”), Marketwatch (“Treasurys rise on hedge fund woes”), and The Herald (“Complex hedge funds criticised”). I’ve heard the term over the past several years, but what exactly are these products called hedge funds? I was curious for more information, so I spent some time researching.

The Hedge Fund Center, which presents unbiased information about these products, provides this definition of a hedge fund:

• “A hedge fund is a private investment limited partnership that invests in a variety of securities. There are two types of partners in a hedge fund, a general partner and limited partners. The term hedge fund is misleading in that a hedge fund does not necessarily have to hedge…”
• “Hedge Funds are pooled investments, all the partner’s capital amounts are pooled together for the purpose of trading in securities. All hedge funds follow some sort of trading strategy and are pretty much free to use any financial instrument they wish”

Hedge funds are similar to mutual funds since they both accept money from investors and pool that money together in order to efficiently trade in the market. However, hedge funds aren’t required to register under securities laws, and participation is often private. Smaller investors who want to invest in hedge funds can do so by investing in “funds of hedge funds.” These mutual funds allow lower minimum investments.

Universities often invest large amounts in hedge funds. At Duke, Stanford, Yale, and other colleges, some students have initiated campaigns for their schools to disclose information about these investments. Since their is no transparency and the investments aren’t bound by the SEC, concern is growing.

I don’t think that this type of investment is appropriate for me, a very small-time investor. Here are more resources for learning more about hedge funds:
* The Hedge Fund Center mentioned above
* The Hedge Fund Association, a non-profit uniting the hedge fund industry
* The Securities and Exchange Commission answers questions about hedge funds
* Investopedia contains an article describing hedge funds and funds of hedge funds.
* Jonathan Weber of Business 2.0 wrote an article in April: Rolling The Dice On Hedge Funds
* If you know of other resources that you find useful, share them in the comments below.