What is a hedge fund?
Beginners · Video 1 of 12 · 0:44 ·
A hedge fund is a private pool of money from several investors, run by one manager with one strategy. Each investor owns a slice sized by what they put in. Unlike a mutual fund, it isn't sold to the public, and the manager is usually paid a yearly fee plus a share of the profits.
Everything here is for educational purposes only and is not legal, tax or investment advice, or an offer to buy or sell any security. Laws and thresholds change and depend on your facts, so talk to a qualified attorney before acting.
Key facts
- Investors' money is pooled and run by one manager.
- Each investor owns a share in proportion to what they invested.
- It is private: only investors an exemption allows can invest, unlike a mutual fund.
- Managers are commonly paid a yearly management fee (often 2%) and a share of profits (often 20%).
- The name comes from Alfred Winslow Jones, who in 1949 bought stocks he liked and bet against others to hedge market falls.
Transcript
Founder: My friends keep asking me to invest their money.
Operator: Then you're about to build a hedge fund. Here's the whole idea.
Operator: Everyone's money goes into one pot, and you trade the pot.
Operator: Each friend owns a slice, sized by what they put in. If the pot grows 10%, every slice grows 10%.
Founder: So it's a mutual fund.
Operator: Cousin, not twin. Anyone can buy a mutual fund. A hedge fund is private, open only to investors the law allows.
Founder: And what do I get out of it?
Operator: Usually a small yearly fee, plus a share of the profits. You do well when they do well.
Founder: Why is it called a hedge fund, though?
Operator: 1949. Alfred Winslow Jones bought stocks he liked, and bet against ones he didn't. When the market fell, those bets cushioned the drop.
Operator: He hedged. The name stuck.
Founder: So my friends keep asking me...