Hedge – like the shrub is meant to act as a wall or rampart against attack.
A hedge fund is a monetary apparatus of pooled monies designed to weather a market attack. It’s a complicated and high risk investment.
I work in the industry. A hedge fund is a type of asset manager that manages money typically for institutional clients. There are MANY types of hedge funds, each with different strategies, but the thing they all have in common is that they manage money by buying assets to target specific risks, while hedging out specific risks they don’t want exposure to.
So for example, an equity market neutral (EMN) hedge fund will buy stocks (long) and short other stocks to offset their TOTAL net exposure (i.e. they are now NEUTRAL to the equity market). This type of fund doesn’t want directional market exposure – they want to express their views with their long positions. I’m happy to take follow up questions if you’d like! The industry is just really vast and it’s hard to answer without getting more specific
The original idea was that a hedge fund would make investments that would go up when the stock market went down, which would allow investors to “hedge” (or protect themselves against) a drop in the stock market. For example, an insurance company puts most of the money it receives from premiums into stock investments to generate returns on the money they hold, but if there was disaster those investments would go down at a time where they need the money. A hedge fund investment was intended to provide protection against that.
Over time, the term has come to broadly cover funds that are available to very select investors to make various types of alternative investments that are intended to get a better (or at least different) result from a typical stock market index fund investment, but they’ve largely moved on from the concept of going up when the market goes down. You could find a hedge fund that intends to pr3x the return of the stock market by borrowing money cheaply to allow more money to be invested in the market.
If you watch The Big Short, for example, the funds that are “betting against the housing market” are hedge funds, and in that case making pretty traditional hedging investments, because their bets against the housing market went up when the stock market crashed.
Usually a bunch of other very wealthy people’s money invested together and managed by a group of people with an individual at the top of the company. Managers/employees might have their own money in the investment but they usually make their money off fees, percentage profit payouts and are not risking their own money in the investments.
Their purpose is to actively manage the funds so their investments do much better than the by people trying to out return the market average rate of return. Given their large amount of money at their disposal in their investment they can buy large shares or otherwise do things to help make their return for their money more likely to happen. However, their attempts at taking larger risks for more money can see them significantly underperform in some years. Generally less regulated then mutual funds and depending on the investment agreement you have in place might have restrictions on when/how much you can withdraw if you find yourself needing cash now.
Hedge funds hedges your risks against broad market downturn. Don’t expect them to make profit when times are good, but the promise is that when everything else turns to shit, a hedge fund will come out ahead. Will it really? Maybe. But this is very difficult to achieve on your own so that’s why people pay for that service.
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Pooled investment money for seeking profit, more or less wherever, and usually shared with the managers by an agreed formula.
Hedge – like the shrub is meant to act as a wall or rampart against attack.
A hedge fund is a monetary apparatus of pooled monies designed to weather a market attack. It’s a complicated and high risk investment.
I work in the industry. A hedge fund is a type of asset manager that manages money typically for institutional clients. There are MANY types of hedge funds, each with different strategies, but the thing they all have in common is that they manage money by buying assets to target specific risks, while hedging out specific risks they don’t want exposure to.
So for example, an equity market neutral (EMN) hedge fund will buy stocks (long) and short other stocks to offset their TOTAL net exposure (i.e. they are now NEUTRAL to the equity market). This type of fund doesn’t want directional market exposure – they want to express their views with their long positions. I’m happy to take follow up questions if you’d like! The industry is just really vast and it’s hard to answer without getting more specific
The original idea was that a hedge fund would make investments that would go up when the stock market went down, which would allow investors to “hedge” (or protect themselves against) a drop in the stock market. For example, an insurance company puts most of the money it receives from premiums into stock investments to generate returns on the money they hold, but if there was disaster those investments would go down at a time where they need the money. A hedge fund investment was intended to provide protection against that.
Over time, the term has come to broadly cover funds that are available to very select investors to make various types of alternative investments that are intended to get a better (or at least different) result from a typical stock market index fund investment, but they’ve largely moved on from the concept of going up when the market goes down. You could find a hedge fund that intends to pr3x the return of the stock market by borrowing money cheaply to allow more money to be invested in the market.
If you watch The Big Short, for example, the funds that are “betting against the housing market” are hedge funds, and in that case making pretty traditional hedging investments, because their bets against the housing market went up when the stock market crashed.
Usually a bunch of other very wealthy people’s money invested together and managed by a group of people with an individual at the top of the company. Managers/employees might have their own money in the investment but they usually make their money off fees, percentage profit payouts and are not risking their own money in the investments.
Their purpose is to actively manage the funds so their investments do much better than the by people trying to out return the market average rate of return. Given their large amount of money at their disposal in their investment they can buy large shares or otherwise do things to help make their return for their money more likely to happen. However, their attempts at taking larger risks for more money can see them significantly underperform in some years. Generally less regulated then mutual funds and depending on the investment agreement you have in place might have restrictions on when/how much you can withdraw if you find yourself needing cash now.
Hedge funds hedges your risks against broad market downturn. Don’t expect them to make profit when times are good, but the promise is that when everything else turns to shit, a hedge fund will come out ahead. Will it really? Maybe. But this is very difficult to achieve on your own so that’s why people pay for that service.