Hedge Fund
A private pooled investment fund using sophisticated strategies — including short selling, leverage, and derivatives — available only to accredited investors.
What is Hedge Fund?
A hedge fund is a private investment partnership that pools capital from high-net-worth individuals and institutional investors and deploys it using a wide range of strategies not available to conventional mutual funds, including short selling, leverage, derivatives, arbitrage, and concentrated positions in illiquid assets. Unlike mutual funds, hedge funds face minimal regulatory constraints on investment strategy, allowing managers to pursue absolute returns regardless of market direction. Investors must typically qualify as accredited investors under SEC rules (net worth over $1 million excluding primary residence, or income exceeding $200,000 annually). The standard fee structure — known as 2-and-20 — charges a 2% annual management fee on assets and a 20% performance fee on profits, though fee compression has reduced average fees over time.
Example
Renaissance Technologies' Medallion Fund, available only to current and former employees, has reportedly generated average annual returns of roughly 66% before fees — among the highest sustained returns in investment history — by using quantitative models to exploit small pricing anomalies across thousands of securities. Its extraordinary performance is cited as evidence that exceptional edge can persist in markets, though the fund's opacity makes independent verification difficult.
Source: Investopedia — Hedge Fund