Hedge funds are private investment organisations in Europe and the USA. These are generally structured are limited liability partnership with the general partner being the portfolio manager, making the investment decisions and other partners as investors.
The investor partners are super-rich institutions, professionals and wealthy individuals (as minimum investment amount ranges from $250,000 to $1m). Investment in hedge funds is generally for a lock-in period of one year and so.
The funds provided by all the partners including the general partners are pooled and invested in various financial assets including derivatives. the investment strategy of such funds is generally aggressive and flexible; the funds take all steps, permissible by law for example leverage, long, short, swaps, futures, options and other derivatives in the both domestic and international market to get high returns on the investment made by the partners.
Hedge funds are subject to the same market rules and regulations as any trader.
There are no such limitations on the hedge funds as are applicable to the other pooled investments like mutual funds.
No registration is necessary with the Securities and Exchange Commission or Financial Services Authorities.
No special reports have to be submitted, no investors protection guidelines have to be followed. However, like mutual funds, hedge funds are subject to anti-fraud provisions of securities laws.
History of Hedge Funds
The first hedge fund was set up by A. W. Jones in 1949 in the USA. This fund was to protect its investors against risk using various techniques i.e. heading of risk was the core of its investment strategy. hence, it was referred to as a Hedge Fund. Today the term ‘Hedge Fund’ refers not to such as hedging techniques, which hedge funds may or not employ, as it does to their status as private and unregistered investment pools.
Hedge funds generally provided very high returns to the investors even during the periods of falling the share prices, though there have been some cases of huge losses and there have been some frauds too. These types of investments are suitable for people who are ready to take risks with a huge amount of money.