hedge fund

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hedge fund,

in finance, a largely unregulated investment device with a relatively small number of investors that aims to outperform the markets. Originating in the 1950s, the funds "hedge" by offsetting "short" positions (borrowing a security and then selling it at a higher price before repaying the lender) against "long" positions (borrowing money to speculate on undervalued stocksstock,
in finance, instrument certifying to shares in the ownership of a corporation. Bonds are similar evidences of shares in a loan to a corporation. Stock yields no dividends until claims of bondholders have been met.
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; see hedginghedging,
in commerce, method by which traders use two counterbalancing investment strategies so as to minimize any losses caused by price fluctuations. It is generally used by traders on the commodities market.
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). Not all so-called hedge funds are actively involved in hedging, and since the 1980s many hedge funds have been involved in sometimes very significant speculationspeculation,
practice of engaging in business in order to make quick profits from fluctuations in prices, as opposed to the practice of investing in a productive enterprise in order to share in its earnings.
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. In general, hedge funds, besides being unregulated, are investment capital funds that are limited to wealthy investors and large institutions, that are structured as partnerships, and that use investment strategies involving higher risks in an attempt to produce greater financial gains. The fees associated with hedge funds are high, and can reduce the returns to levels in line with investments involving lower risks. Aggressive hedge funds work with highly leveraged securitiessecurities,
in finance, instruments giving to their legal holders rights to money or other property. Securities include stocks, bonds, notes, mortgages, bills of lading, and bills of exchange. See speculation and stock exchange.
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, often purchased with less than 5% of actual investor capital, with banks covering the balance. Macro hedge funds speculate in currencies of various countries; financial analysts and government officials blamed such funds, including George SorosSoros, George
, 1930–, American stock trader and philanthropist, b. Budapest, Hungary, as George Schwartz. He studied under Sir Karl Popper at the London School of Economics (grad. 1952).
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's Quantum fund, for disrupting the economies of Asian and Latin American countries in 1998. Other funds speculate in gold and other volatile commodities, or simultaneously buy and sell a stock or other financial instrument in two different markets to profit on the difference in value in the two markets (a technique called arbitrage). Funds are classified as U.S. or offshore; U.S. hedge funds are private investment partnerships that generally invest in traded securities. Offshore hedge funds (normally not open to U.S. investors) are mutual fundmutual fund,
in finance, investment company or trust that has a very fluid capital stock. It is unique in that at any time it can sell or redeem any of its outstanding shares at net asset value (i.e.
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 companies.

Hedge funds came to public view in 1998 when Long-Term Capital Management (a U.S. fund) nearly collapsed, requiring a $3.5 billion bailout organized by the Federal Reserve Bank of New York and paid for by private banks. The bailout led to a number of U.S. and international investigations into hedge funds and calls for greater regulation and scrutiny. An attempt by the Securities and Exchange Commission in 2004 to require hedge funds to register with it was overturned by the federal courts. In 2006 another major U.S. hedge fund collapse, that of Amaranth Advisors, cost investors more than $6 billion. By 2007 the assets of such funds were estimated at more than $1 trillion; in February of that year the Bush adminstration and U.S. financial regulators rejected increasing the regulation of the funds and instead recommended that persons, institutions, and banks engage in sound practices before investing in or lending to a hedge fund.

Bibliography

See study by S. Mallaby (2010).

References in periodicals archive ?
Of the private equity firms surveyed, 58% say they would never get involved in hedge fund investing, while 26% have discussed getting involved in hedge funds, only 2% have plans to do so.
1% in December, and more than 37% in 2009, as many convertible-arbitrage hedge funds were wiped out in 2008, leaving opportunity for those that remained in the market.
Hedge funds also buy coverage, most notably financial institutions policies such as errors and omissions coverage.
org/report), in particular the issue of gathering sufficient financial statement data about hedge funds and other lightly regulated entities to understand counterparty risk.
General Electric has a market capitalization of roughly $390 billion and in many ways is a portfolio of different operating units, much as a hedge fund is.
In addition, most hedge funds prefer a large open area for trading, a conference room, several private offices and a warm reception area for greeting clients.
The industry has matured since my first introduction to hedge funds in 1980 and investors are becoming far more comfortable with hedge funds as an asset class," says Elizabeth Lee Hennessee, Founder and Managing Principal of Hennessee Group LLC.
Moreover, any such data would need to be wiewed skeptically because of differing definitions of hedge funds and because of problems inherent in any attempt to aggregate the various risks and potential risks that might be involved in the range of products offered by banks to hedge funds.
The October 2006 report outlined two methods for creating synthetic hedge funds: (1) replicate hedge fund benchmarks with a dynamic portfolio of liquid assets, and (2) execute strategies similar to those employed by active hedge funds.
Of course, there is much debate about whether the hedge funds really were the primary culprits in the Asian financial crisis.
Half of the survey respondents are open to switching from traditional private limited partnership investments to investments in publicly traded shares sold by hedge funds.