About Hedge Funds

To "Hedge", according to Webster's dictionary, is " a means of protection or defense (as against financial loss), or to minimize the risk of a bet". These two definitions appropriately apply to our investment philosophy, to PRESERVE CAPITAL.

The term "hedge fund" includes a multitude of skill-based investment strategies with a broad range of risk and return objectives. A common element is the use of investment and risk management skills to seek positive returns regardless of market direction.

A hedge fund is a private "pool" of capital for accredited investors only and organized using the limited partnership legal structure.

The general partner is usually the money manager and is likely to have a very high percentage of his/her own net worth invested in the fund.

The fund has an offering memorandum (Prospectus) which is intended to provide much of the necessary information to support an investor’s due diligence. Among several topics, the offering memorandum will specify the trading style, hedging strategies, and instruments to be employed by the fund at the discretion of the general partner (i.e. being long and /or short stock; use of puts, calls, and futures; use of OTC derivatives).

Hedge funds utilize alternative investment strategies for the purpose of achieving superior returns relative to risk (i.e. return vs. standard deviation). Performance objectives range from conservative to aggressive.

Today the term hedge fund has been broadened to include any private pool of capital that charges a management fee and performance fee. The degree of hedging varies. In fact, some do not hedge at all while others simply use S&P put options and futures in lieu of shorting equities. Consequently, there is a broad spectrum of expected risk and return within the hedge fund universe.

In Summary:
Hedge funds are legally limited partnerships.
Hedge funds are historically unregistered (i.e., unregistered with the SEC) investment companies, although SEC regulations are changing this policy.
Hedge funds can be users of a variety of investment strategies and products, including options, future, swaps and short selling.
Hedge funds often employ leverage, in that the amount of notional market exposure often exceeds the investment capital of the fund.
Hedge funds have limited liquidity. Typically investors can only get into funds on certain dates and can only get their money out of funds on certain dates.

Credit should be given to Neil A. Chriss as some of these references are a compilation from a lecture series.