Define the term "hedge fund"

[Dispassionate]

What a misnomer. What exactly defines a "hedge fund" anyway?

All this hysteria about regulation because hedge funds are deemed more risky thant other funds is all much ado about nothing and actually only displays huge ignorance on the part of the regulators about risk, margin and volatility.

 

[LION63]

The term originated in 1949 when Alfred Wimslow Jones launched a "hedged fund" that both bought stocks and sold them short in order to hedge its exposure to the market's ups and downs. The term caught on, slightly altered, as shorthand for all unregulated investment funds.
Source: Fortune Magazine.

 

[contrakt]

hedge strategy is to optimize total net return after risk, cost, intrest and tax
instead of benchmarking.

 

[TWI]

The regulation is not aimed at what the hedge funds are trading but rather how they handle investor funds.
Hedge funds are not generally more risky than any other type of derivative investment.

 

[bundbaby]

In fact, many hedge funds may not have a single financial derivative in them at all. You are quite right twalker when you say that its how they manage their investors that count. They in effect are outside the protection of "lay" investors. The one defining thing about hedge funds is that they take investment money from those the law deems a professional investor and as such they fall outside the protection that non-professionals would have. (e.g. a unit trust or pension fund)

 

[john5000]

The traditional textbook definition would be something like a pooled investment vehicle that is privately managed by professional inv managers & not widely available to the public. However nowadays it often just refers to any investment fund that isn't restricted to a long-only non-leveraged investment strategy.

The regulation is not aimed at what the hedge funds are trading but rather how they handle investor funds.
Hedge funds are not generally more risky than any other type of derivative investment.

Though reported peformance & risk can often be hard to trust as it will be influenced by survivorship & selection bias as well other biases caused by valuation problems (e.g OTC securities, distressed co. shares, etc), this will also affect the percieved volatility. Additionally although many many funds will have a 0 beta & low systematic risk this does not automatically imply low risk as many funds will carry a substantial specific risk.

 

[GruntnoWay]

Most funds are concerned with Relative Returns. Hedge funds are concerned with Absolute Returns and will achieve this for shorting anything that goes down and going long of anything that goes up. Futures and options play an important part of the strategy.

 

[A Dashing Blade]

It's a prop desk that has outsourced everything it possibly can and is legally structured to fall outside the reach of regulatory authorities.

 

[TWI]

Now that is a great definition. I would go with that one.

 

[anley]

For at least 80% of them this is the correct definition -

"A compensation scheme masquerading as an asset class"

So many ways to skim the client, so many ways for the managers and prime brokers to make money, so little at the end of the day for most clients, unless of course you're with the very best funds which 99% of the time the man in the street has no chance in investing in.

 

[anley]

I also like the phrase that some people talk about 'Hotel California Hedge Funds'

ie, those that let you check your money in but never let you check it out (via all sorts of penalties and time guarantees etc).