Introduction to Hedge Fund

Hedge funds, with their historically low correlation to traditional asset classes, respond to this concern (although correlations have started to increase considerably over the past three years). These alternative investment vehicles may offer investors added diversification and a better chance to outperform the market over a longer timeframe. However, before committing capital, investors should be familiar with all facets of hedge fund investing.

The term “hedge fund” is a broad category that commonly refers to a private investment fund managing a large sum of money at its own discretion, sometimes employing strategies to “hedge” against certain market risks. Perhaps the most defining characteristic of hedge funds is that they are subject to fewer regulatory requirements than traditional investments. This allows the hedge fund managers, who are usually experienced investment professionals, to use creative strategies that fully utilize their expertise and often provide investors with attractive risk-adjusted returns. Another defining characteristic is that they tend to be limited to accredited investors.

With few regulatory curbs on their investment strategies, hedge funds can use complex derivative instruments that reduce the correlations of their returns with the traditional asset classes. The main advantage of this is more diversification, as a hedge fund investment may act independently of broader market movements, which can provide a stabilizing effect on a portfolio during times of uncertainty. These added benefits have increased their popularity over the last few decades, with total assets increasing from $39 billion in 1990 to $2.13 trillion in the first quarter of 2012.

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