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Hedge Fund

In short

Actively managed investment fund using advanced strategies — restricted to wealthy investors

Hedge funds are investment pools that use complex strategies: short selling, leverage, derivatives. They're only available to wealthy accredited investors. Most charge '2 and 20' — 2% management fee plus 20% of profits.

Hedge funds are private investment partnerships that employ sophisticated strategies (long/short equity, global macro, statistical arbitrage). Limited to accredited investors. The 2-and-20 fee structure significantly erodes returns. Industry-wide, most hedge funds have underperformed the S&P 500 since 2009.

Related concepts

  • Alternative Investments — Alternative investments are anything outside stocks, bonds, and cash — real estate, hedge funds, private equity, commodities, and crypto. They often have low correlation to traditional markets, improving portfolio diversification.
  • Alpha — Alpha is the extra return a fund earns above what you'd expect given its risk. If the market returns 10% and your fund returns 13% with the same risk, alpha is 3%. Positive alpha = the manager adds value.
  • Sharpe Ratio — Sharpe ratio measures how much return you get for every unit of risk you take. A Sharpe of 1.0 means for every 1% of risk, you earn 1% return above the risk-free rate. Higher is better.
  • Active Investing — Active investing means trying to pick stocks or time the market to outperform the index. It requires research, analysis, and discipline. Most active managers fail to beat their benchmark after fees over 15 years.