What is a Hedge Fund?

In 1949 the first hedge fund was established by Alfred W. Jones, who was the first to use the combination of leverage and short sales techniques. Hedge funds are similar in nature to mutual funds due to the fact that both investment vehicles pool together investors money and collectively invest these funds. Hedge funds historically lived up to their name by attempting to hedge the downside risk of a bear market via leverage and short sale techniques as its implementor Alfred W. Jones first established. However, today a vast array of techniques are used in hedge funds with the original aspect of hedging most of the time not even entering the picture.

The ultimate goal of these varying techniques is to generate high returns for its investors. Primarily hedge funds are set up as private partnerships with a limited number of (generally rich) investors. Due to their illiquid and highly unregulated nature, United States law requires for a majority of the investors in a hedge fund to be accredited.

Hedge funds escape most the regulations that other funds such as mutual funds are subject to by the Securities Exchange Commission (SEC). If a hedge fund manages fewer than 15 funds it is not mandatory for them to register with the SEC. One regulation that hedge funds are not able to escape are the anti-fraud provisions of United States federal securities laws. Even though hedge funds are similar to mutual funds, they escape many of the regulations that mutual funds have to adhere to such as:

• liquidity requirements
• allowing shares to redeemable at any time
• disclosure regulations
• limits on the use of leverage

Though hedge funds in the United States are highly unregulated the case is different in other parts of the world. The nations of Europe for one make an attempt to have regulations in place for hedge funds. European nations often regulate hedge funds either by the type of investors they have or by the minimum subscription level needed to invest in hedge funds.