Last years credit crunch certainly took a toll on investors everywhere and Hedge Funds were certainly no exception.  It has been estimated that at the peak of the industry Hedge Funds had approximately 2.5 trillion in assets under management.  A combination of losses and withdrawals have put recent assets under management estimates at 2 trillion.

So what exactly is a hedge fund? A hedge fund is an aggressively managed investment fund that seeks to achieve absolute returns.  Investments in hedge funds are usually illiquid often carrying with them a lock up period of at least one year.  They are usually structured as private partnerships requiring investors to invest a substaintial lump sum, meaning these are not for your average investor.  Hedge Funds often employ complex investment strategies utilizing short positions, derivatives and leverage in both the domestic and international markets.

The first hedge fund was started by Alfred Jones who believed that performance of an individual asset could be partially atributed to the asset itself and partially to the overall market.  To reduce the risk of overall market movement Jones purchased positions he expected would rise in value and shorted positions he thought would fall in value, over time he realized that his portfolio became neutralized from general market movements because as the market rose the loss on short positions would be covered by the gains on the long positions and vice versa.  The idea was to hedge the portion of risk due to overal market movement leading to the term “hedge fund”.

Hedge funds charge investors fees much like a mutual fund, ranging from 1-4% of assets under managment and often employ high watermarks meaning that managers only receive performance fees on net asset values higher than the previous highest net asset value.

A word of caution on hedge funds, as private pools of money they are not subject to the same regulatory guidelines as a mutual fund.  Hedge funds are not required to disclose their activities to third parties,  this has lead to transparancy issues.  Although transparency to non-investors has been very limited in the past, investors of some hedge funds enjoy access to the fund manager and sometimes personalized reporting, some funds though release very little information even to their own investors.