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 ?
Insurer Hedge Fund Investments Drop a Second Year; AIG a Big Driver of Trend
Especially, wealthy people choose hedge funds as a means to manage their assets.
The functioning of hedge funds has been shrouded in mystery leading to curiosity to know of what goes on behind the iron curtain of secrecy .The available literature talks mostly about hedge funds rather than throwing light on the how part of it.
Hedge funds gained 0.84 per cent in December and 8.24 per cent for annual year 2017 with underlying markets, as represented by the MSCI AC World Index (Local) up 17.55 per cent for the year.
Hedge fund flows are increasingly driven by brand and distribution, which smaller hedge funds lack.
Hedge funds and other money managers added the equivalent of 56 million barrels of extra short positions in the three main Brent and WTI futures and options contracts in the week ending July 26.
The average hedge fund performance has been disappointing during this bull market, compared to the S&P 500.
The number of hedge funds has multiplied more than 16 times over in the past 25 years, according to the data group HFR.
We know that hedge funds have made a small subset of financial titans fabulously wealthy.
The Q2 Hedge Fund Tracker analysis found that the health care sector has continued to drive bulk of buying among the largest pure play hedge fund managers for the second straight quarter, with net buys of USD7.2 billion in the quarter, up from USD4.8 billion in the first quarter 2015.
Besides the complexity for the pension fund, hedge funds' high fee rates, whether fully earned or not, can throw up a big hurdle.