Learn about Hedge Funds with iMinds Money's insightful fast knowledge series.
A hedge fund is a type of investment structure for managing a private, unregistered investment pool. Within this investment portfolio the fund manager is permitted to use a number of higher risk investment strategies. Although a wide range of strategies are used the most common is long/short equity. This was the strategy used by the first hedge fund in the United States of America in 1949 and is still the most popular today. The strategy simply involves a hedge fund manager buying shares they think will rise in price and short-selling shares they believe will fall. This strategy allows for large profits, but also very large losses. Hedge funds may also take advantage of another high-risk strategy by using borrowed money to produce a greater return. However, despite the riskier strategies employed, hedge funds had become extremely popular and common, especially in the United States of America, prior to the financial crisis of 2007 – 2008. This is due to their ability to potentially provide great profits.
In a good year hedge funds can return profits of over 20 per cent. Many hedge funds also limit the number of investors, meaning each participant gets a larger share of the profits. However, unlike most other funds, a hedge fund pays a percentage of the profits to the fund manager.
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