A hedge fund is a privately offered investment fund with a flexible mandate — able to sell short, use leverage and derivatives, and trade across markets — typically open only to accredited investors and qualified purchasers. The name survives from the original “hedged” long/short design; the modern category spans any privately pooled, actively traded strategy.
Structure and strategies
Hedge funds are private placements organized under the 3(c)(1) or 3(c)(7) exemptions — hence the accredited investor and qualified purchaser gates — usually as GP/LP partnerships domestically, with master-feeder structures sorting U.S., offshore, and tax-exempt capital. Unlike drawdown funds, hedge funds run open-end: capital is invested at subscription and redeemable periodically at NAV, making liquidity terms part of the product design.
Strategy families: long/short equity (the original), global macro (rates, currencies, commodities on top-down views), event-driven (mergers, restructurings, distressed), relative value/arbitrage (pricing gaps, convertible and credit arb), quantitative/systematic, and multi-strategy platforms allocating across all of them — the pod-shop model that has absorbed much of the industry’s capital and talent. The honest performance framing: dispersion across managers dwarfs the category average, and the pitch has shifted from outperformance to diversification — return streams with low correlation to stocks and bonds, valued for what they do to a portfolio rather than in isolation.
Fees and mechanics advisors should know: the classic two-and-twenty has compressed and mutated (pass-through expenses at multi-strats can exceed it), with the high-water mark ensuring performance fees only on new gains and hurdle rates appearing increasingly. Liquidity machinery is its own vocabulary: lock-up periods for new capital, redemption notice windows, gates limiting exits per period, and side pockets quarantining illiquid positions — terms that mattered enormously in 2008 and still define the fine print. Access for advised clients runs through direct subscription (QP-level funds), feeder platforms, and registered liquid-alternative or tender offer fund wrappers that trade some strategy purity for accessibility.
FAQ
What is a hedge fund in simple terms?
A private fund that can invest almost any way it wants — long, short, leveraged, across markets — for qualifying investors, charging management plus performance fees.
How do hedge funds differ from private equity?
Liquidity and holdings: hedge funds trade mostly liquid instruments with periodic investor redemptions; private equity buys companies through locked, drawdown-style funds. Fee mechanics differ accordingly (high-water marks vs. waterfalls).
Who can invest in hedge funds?
Generally accredited investors at minimum, and qualified purchasers ($5M+ in investments) for 3(c)(7) funds — with feeders and registered wrappers extending partial access below those lines.
Related terms
Two and Twenty · High-Water Mark · Gate Provision · Lock-Up Period · Side Pocket · Qualified Purchaser
Educational content only; not investment, tax, or legal advice. Consult qualified professionals regarding your specific circumstances.
