What is a hedge fund?

A hedge fund is a pooled investment vehicle that collects capital from institutional investors and high-net-worth individuals. Unlike mutual funds, hedge funds have fewer regulatory restrictions. This flexibility allows managers to employ diverse strategies, including short selling, leverage, and the use of complex derivatives to generate returns regardless of market direction. These funds typically charge a performance fee structure known as two and twenty. This means the manager charges a 2% management fee on total assets and a 20% performance fee on profits. Most hedge funds require investors to meet accredited investor status, which often involves having a net worth exceeding $1 million, excluding a primary residence, or an annual income over $200,000. Liquidity is often limited compared to retail investment products. Many funds enforce lock-up periods ranging from one to three years, during which investors cannot withdraw their capital. Because hedge funds utilize aggressive strategies and high leverage, they carry significant risk. Investors can lose their entire principal investment due to market volatility or poor management decisions. Trading and investing in these vehicles involve substantial risk and are not suitable for all participants.