Hedge Funds

Hedge Funds

A hedge fund is defined as an aggressively managed portfolio geared to generate high returns. A hedge fund involves a group of investors or partners, who employ high risk strategies in the hopes of making high profits or high returns. For example, it is considered very risky to borrow money in order to invest, since losing the capital would result not only in a loss but also in debt. Conversely, low risk investments may guarantee capital, such as GICs (Guaranteed Investment Certificates), but because there is less risk, the profits or returns are likewise lesser. Generally, investing may be divided into aggressive strategies and conservative strategies.

Usually hedge funds, unlike mutual funds, are open to a limited number of individuals because they require high sums to be invested and locked in the fund for long periods of time (typically at least one year, but the large amounts of capital required, specify that only a limited number of investors can afford participation in a hedge fund).

Toronto Dominion Bank. Aside from major Canadian banks, there are many insurance companies, trust funds and credit unions. Photo by Elena

In the United States of America, the majority of hedge funds are unregulated, unlike mutual funds. The reason behind this is that investors in a hedge fund must be accredited, must make a certain income per year and must have a minimum net worth of one million dollars ($1,000,000) in order to invest in a hedge fund. Thus, it is implied that hedge fund investors possess a certain level of investment knowledge unlike mutual fund investors. Mutual funds are open to the public, and allow investors with much lesser capital to invest to profit from a professionally managed portfolio.

What may sound confusing is that hedging is actually a term meaning minimization of risk, but the goal of hedge funds are to maximize return on investment (ROI), thus a significant proportion of investment strategies involved may be quite risky, especially from the point of view of a conservative investor or a risk-averse investor.