What is a Hedge Fund?
originally posted: 11/22/2006 reposted: 2/18/2011 This post has not been recently reviewed or revised by the author and may be out of date. If you notice an error or are in doubt, please send a new question by email or ask for an update. Email asktony@tonynovak.com.
Q: What is a hedge fund?
A: Hedge funds are similar to mutual funds in many aspects but their performance is not based on the performance of the underlying markets. Hedge funds are used by wealthy investors to diversify their portfolio and insulate them from market risks. At least that's what they are supposed to do - it does not always work out that way, First of all, hedge funds are not for ordinary investors. The minimum investment is $25,000 and many have a minimum of $250,000 or more. The fees are steep, often 3% of assets plus the manager keeps 30% of the profits. Still, there are years when hedge funds outperform stocks and mutual funds. This explains their popularity; there are almost as many hedge funds operating today as there are mutual funds or stocks. If you don't qualify to be in a hedge fund, don't worry, an average stock or mutual fund will probably outperform the average hedge fund in 2005.
Summary
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