Hedge Funds have been gaining more attention in the investment world lately, likely due to the volatile state of the market. Hedge funds have been around since 1949-when journalist Alfred W. Jones created the first one.
The name "hedge fund" was coined because these funds are notorious for "hedging" off losses in unstable markets by implementing a variety of methods, the most common being shorting stocks. The term is somewhat of a misnomer; however, some hedge funds use short selling and other hedging tactics as a way to actually increase return, as opposed to reducing it.
While many people assume hedge funds are a variation of mutual funds, the two are actually quite different. Mutual funds are registered by the Security Exchange Commission, while hedge funds are private, unregulated investment vehicles. Another key difference is that mutual funds are available to the general public, where hedge funds are only available to accredited investors with a net worth exceeding $1 million. Also, partnership is limited in a hedge fund whereas with mutual funds it is not.
There are 14 different types of hedge funds, each with their own strategies. A macro fund, for example, aims to profit on shifts in interest rates and economic policies, while an equity hedge fund uses the strategy of short selling overvalued stocks.
Primarily, most hedge funds seek to reduce risk while delivering positive returns in varying market conditions. Because hedge funds are so diverse, investments can be in stocks, bonds, private companies, real estate, commodities, etc. This diversity is largely what allows them to deliver positive returns most of the time.
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