hedge fund (redirected from hedgefund)

hedge fund, in finance, a highly speculative, largely unregulated investment device. 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 stocks; see hedging; speculation). Aggressive hedge funds work with highly leveraged securities, often purchased with less than 5% of actual investor capital, with banks covering the balance. Hedge funds can produce extremely high returns on investment; participation is limited to wealthy investors and large institutions. Macro hedge funds speculate in currencies of various countries; financial analysts and government officials blamed such funds, including George Soros's Quantum fund, for disrupting the economies of Asian and Latin American countries in 1998. 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 fund 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 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 a 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.