Hedge Funds 101
What are hedge funds?
Hedge funds are alternative investment funds managed by professional investors who use a wide range of strategies across public and private markets. They are designed to help investors, including pensions, foundations, and endowments diversify portfolios, manage risk, and generate returns in both rising and falling markets.
Hedge funds promote vibrant capital markets by investing across borders and asset classes, improving market efficiency and contributing to liquidity. The returns they generate enable institutional investors meet long-term financial commitments, including retirement benefits, scholarships, and charity programs.
How do hedge funds work?
Hedge funds pool capital from investors and deploy it across a wide range of markets, asset classes, and geographies. More conventional investment funds, such as mutual funds and exchange traded funds (ETFs), are known for generating returns only when markets go up.
Hedge funds use a broader set of tools—such as short selling, derivatives, and investing in a broad range of noncorrelated assets—to make money in all sorts of market environments, including periods of heightened volatility. This flexibility stems from hedge funds’ active management style, enabling them to manage risk and rapidly respond to changing market conditions.
What are common hedge fund strategies?
Long/short equity
Buys stocks expected to rise and sells short stocks expected to fall aiming to hedge overall market risk—an approach that gave rise to the term “hedge fund.”
Global macro
Takes positions across global markets—such as interest rates, currencies, and commodities—based on fundamental economic trends and policy developments.
Event-driven
Invests around corporate events, such as mergers, restructurings, or bankruptcies, seeking to profit from price differences as deals close or companies reorganize.
Relative value (arbitrage)
Seeks to profit from price differences between related assets, expecting those differences to narrow over time.
Credit
Invests in corporate and sovereign debt, seeking to profit from changes in credit conditions, including opportunities in stressed or dislocated markets.
Quantitative
Uses proprietary models and algorithms to identify investment opportunities across large sets of securities and markets.
Managed futures
Trades futures across asset classes—such as commodities, currencies, and interest rates—often following price trends.
Multi-strategy
Combines multiple strategies within a single fund, shifting capital between them to manage risk and pursue returns.
How are hedge funds regulated?
Hedge funds are registered with and regulated by government agencies, including the U.S. Securities and Exchange Commission, the European Securities and Markets Authority (ESMA), and the UK Financial Conduct Authority (FCA). They are subject to stringent disclosure, reporting, and compliance requirements that protect investors and support market integrity.
Who invests in hedge funds?
Pensions, university endowments, and nonprofit foundations invest over $1.5 trillion in hedge funds. These institutions rely on hedge funds to diversify portfolios, manage risk, and meet long-term financial commitments.
Hedge fund investments support millions of Americans across all 50 states by helping institutions meet long-term commitments that benefit retirement savers, students and local communities.
Hedge funds support pensions providing retirement security for over
Hedge funds strengthen local communities across the country by supporting the mission-driven work of more than
Hedge funds support thousands of students by growing endowments that fund scholarships, programs, and research at more than
How does your state benefit?
Explore how hedge fund investments support institutions and communities in your state.
FAQs
What do hedge funds invest in?
Hedge funds invest across a wide range of public and private markets, including stocks, bonds, currencies, commodities, derivatives and distressed debt. Their flexible mandates allow managers to use a variety of strategies and respond quickly to changing market conditions.
Who can invest in hedge funds?
Hedge funds are primarily available to institutional investors and qualified individual investors. Institutional investors include pension funds, university endowments, foundations, and other organizations that use hedge funds to help meet long-term financial goals.
How can hedge funds balance an investment portfolio?
Hedge funds can help diversify an investment portfolio by using a range of strategies across markets and asset classes. Because their returns may not always move in the same way as traditional stocks and bonds, they can complement other investments, help manage risk, and support more consistent returns over time.
Are hedge funds risky?
Hedge funds are not inherently risky. In fact, hedge funds can play an important role in managing portfolio risk. Managers use tools such as diversification, hedging, and active portfolio management to reduce exposure to market volatility and respond to changing conditions. Institutional investors often include hedge funds in diversified portfolios to pursue more consistent, long-term, uncorrelated returns across market cycles.
How are hedge funds different from mutual funds?
Both hedge funds and mutual funds pool capital from investors, but they are designed for different investors and operate under different structures. Mutual funds are widely available to the public and generally face more limits on the strategies and tools they may use. Hedge funds are only offered to sophisticated investors, such as institutions and individuals with significant means, and have more flexible investment strategies. Their investment terms, including fees and withdrawal rights, vary by fund, and investors may negotiate terms to meet their needs.
What role do hedge funds play in the broader economy?
Hedge funds support well-functioning capital markets by providing liquidity, improving price discovery, and helping investors manage risk. Many pension funds, foundations, endowments, and other institutions invest in hedge funds as part of their long-term investment strategies.
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