What Hedge Funds Do
Hedge funds are private investment pools that can bet on prices rising or falling, use leverage and trade almost anything. Here are the main strategies, how they charge and what their filings can and cannot tell you.
Private and flexible
A hedge fund is a private fund, usually open only to wealthy individuals and institutions. Unlike most mutual funds, it can sell short, borrow heavily, trade derivatives and hold concentrated positions. Many aim for returns that do not depend on the stock market rising.
Common strategies
| Strategy | What it does |
|---|---|
| Long-short equity | Buys favored stocks and shorts disliked ones |
| Global macro | Bets on interest rates, currencies and economies |
| Event-driven | Trades mergers, bankruptcies and spin-offs |
| Quantitative | Uses computer models and data to trade |
| Multi-strategy | Runs many teams and strategies under one roof |
| Activist | Buys a stake and pushes management for changes |
General descriptions; many funds mix approaches.
Fees and results
Hedge funds have traditionally charged about 2% of assets a year plus 20% of profits, and some large multi-strategy funds pass through even higher expenses. After fees, the average hedge fund has trailed a simple stock index over long bull markets, though some funds have delivered strong risk-adjusted returns and helped cushion downturns.
Why individual investors watch them
Large managers must publicly disclose many of their stock holdings every quarter. Those filings let anyone see what famous investors own. The key is knowing what the filings show, what they hide and how old the information is, which the rest of this category covers.
Key takeaways
- Hedge funds are private funds that can short, borrow and concentrate.
- Strategies include long-short, macro, event-driven, quant and activist.
- Traditional fees are about 2% plus 20% of profits.
- Their public filings are useful but delayed and incomplete.