Hedge funds

What is a hedge fund?

There is no specific definition of the term ‘hedge fund’. Rather, the label ‘hedge fund’ represents a sort of catch-all for funds that don't sit neatly into any other category of collective investment (eg authorised investment funds or private equity funds). Hedge funds do, however, tend to share certain identifiable characteristics that distinguish them from other kinds of investment fund. At their most basic, they are forms of collective investment that seek to offset the risks inherent in one investment by purchasing another investment that is considered likely to move in the opposite direction.

Most hedge funds will share all (or most) of the following characteristics:

1. •

   open-ended collective investment vehicles—they assume structures that allow investors to request that their investment in the common pool of assets can be redeemed at (almost) any time

2. •

   seeking a total return for investors—they will invest in both long and short positions in stock and other securities with the aim of ensuring that the fund as a whole is hedged against whole-market movement

3. •

   generally opportunistic in strategy—they seek to take advantage of market fluctuations