Hedge Funds- A Brief Description
Unlike mutual funds, hedge funds are not required to register with the SEC (Securities and Exchange Commission). They are pools of funds from wealthy individuals, involved in all sorts of speculative investments all over the world. Hedge funds are restricted to "accredited investors", which means in practice, people who have over $1 million to invest. Accredited investors can also be institutional investors, brokerage houses, pension funds, etc.
Individuals with much lower amounts to invest can invest in "funds of hedge funds", which are mutual funds that invest in hedge funds. So you can invest in these funds, say, $25,000. The drawbacks are that in a fund of hedge funds, you are paying two layers of fees, the fund you bought into, and the hedge fund fees that they are paying.
The original idea of a hedge fund was to make some investments in the opposite direction of others, to "hedge" against losses. For example buying some stocks of the same or similar companies that you have invested in, but buying them "short", where you make money back if the stock goes down.
Many hedge funds strategies attempt to hedge against losses in the markets they trade. They do this by using derivatives such as puts, calls, options, futures and other exotic instruments. An option is the right to make a certain transaction, but not the obligation to do so, in a contract which the bearer buys and then can sell. Call options give someone the right to purchase a commodity or instrument, once it hits a certain price. Put option give someone the right to sell, once a certain price is reached. These are simpler forms of derivatives.
A hedge fund association document asserts that less than five percent of hedge funds are "global-macro funds", using global macro strategies, and large leveraged bets on stocks, bonds, etc. Most hedge funds claim to only use derivatives to hedge against losses.
Hedge funds can have very aggressive or risky strategies, or more conservative money making strategies. Few if any of these funds have any commitment to nations or industries or any idea of quality of life. They are like financial vultures desperate to make quick money anywhere in the world.
One investment strategy is to look for stocks expected to have sudden growth. The hedge funds are not looking for dividends. They hedge by buying stock indexes, or shorting bonds expected to go down. Other strategies center around buying "distressed" securities.