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Hedge Fund
A hedge fund is a private investment fund charging a performance fee and typically open to only a limited range of qualified investors. In the United States, hedge funds are open to accredited investors only. Because of this restriction, they are usually exempt from any direct regulation by the SEC, NASD and other regulatory bodies.
A hedge fund's activities are limited only by the contracts governing the particular fund, so they can follow complex investment strategies, being long or short assets and entering into futures, swaps and other derivative contracts. They often hedge their investments against adverse moves in equity and other markets, because a common objective is to generate returns that are not closely correlated to those of the broader financial markets.
In most countries hedge funds are prohibited from marketing to non-accredited investors, unlike regulated retail investment funds such as mutual funds and pension funds, and are essentially private pools of managed assets. Because of this they have little incentive to release their private information to the public, and have acquired a corresponding reputation for secrecy.
Since hedge fund assets can run into many billions of dollars, and thus their sway over markets—whether they succeed or fail—is potentially substantial, there is a continuing debate over whether further regulation is required.
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In December 2004, the Bank of Canada stated in its 2004 Financial System Review that
the term hedge fund covers a very diverse field of organizations and behavior that
defy any simple definition.
Generally, a hedge fund is a private investment fund limited to a small number of
sophisticated clients who each invest relatively large sums of money. These investors
rely on the expertise of portfolio managers to generate returns. The hedge fund industry
is smaller than the traditional mutual fund industry, not only because of their limited
capital raising opportunities, but also because they need to remain nimble enough to
make profitable trades or investments without significant market impact.
Hedge funds are often described as absolute-return investments. This means that, unlike
traditional mutual funds, hedge funds do not link their performance to any index or
benchmark. Instead, hedge funds use the skill of their portfolio managers to implement
proprietary trading strategies to generate returns independent of the movement of the
broader market.
Although there are over 25 different classes of investment strategies that hedge funds
may engage in, most hedge funds in Canada fall into a few categories. The most
common investment strategy for Canadian hedge funds is the equity long/short strategy,
in which a hedge fund will purchase stocks it believes will rise in price and will sell short
stocks it believes will decline in price, thus generating a profit in both rising and falling
market conditions. Another common strategy is the market neutral strategy, which is a
variant of the equity long/short strategy in which long and short positions are matched so
that the fund has limited exposure to the overall market direction. Less common
investment strategies in Canada include the convertible arbitrage strategy, in which
positions in convertible debt are hedged by selling short the underlying shares, and
managed futures strategies which are based on capitalizing on trends in a variety of
global markets such as currency and interest rate markets.
http://www.hedgefund.ca
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Listing added: Oct 16, 2007)
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