AboutWarren Boroson Expertise Author of "Keys to Investing in Mutual Funds" (Barrons), "Ultimate Mutual Fund Guide" (Probus), "How to Pick Stocks Like Warren Buffett" (JKLasser), and "The Reverse Mortgage Advantage" (McGraw-Hill). Former financial columnist for Gannett News Service.
Experience Author of 20 books; winner of 1996 Personal Finance award from Investment Company Institute and Washington University. Formerly on staffs of Money and Sylvia Porter's Magazine. Had a radio program (on WEVD) about mutual funds and a newsletter, FundDigest.
Expert: Warren Boroson Date: 9/27/2004 Subject: What is a "hedge fund."
Question Hi--
What the hell is a "hedge fund."
I had assumed that it was a fund that did a lot of arbitraging ("hedging").
But I've asked a number of people and none of them think this is a major determinant for being a "hedge fund".
The problem is: There is no agreement among them other than:
1. A "hedge fund" is only for rich investors.
2. A "hedge fund" escapes the rules and laws that apply to other investment vehicles.
There must be more to a "hedge fund" than this. What *is* a hedge fund?
Many thanks,
Steve
nighttrain@nyc.rr.com
Answer Dear Steve--
I've never invested in a hedge fund myself--not rich or adventurous enough.
But I think what unites them is their abililty and inclination to sell short. That explains the word "hedge."
More generally, they are permitted to use a variety of aggressive tactics--not just selling short. Such as leverage, program trading, arbitrage.
Some other typical characteristics:
* They need not register (as of yet) with the SEC, and they are not subject to the rules that govern normal investment companies. (They're partnerships.)
* They are limited to very wealthy individuals or groups, and there are a variety of criteria.
* The general partner typically receives a percentage of the profits, such as 20%.
What makes the term "hedge fund" confusing, I think, is that more and more ordinary mutual funds are using aggressive strategies -- witness the growth of market-neutral funds, which regularly sell short.
