Glossary: What is a hedge fund?

You may have heard the phrase hedge fund used in discussions about finances, economics and markets. But what does the term actually mean? In this post, we take a closer look.

It’s basically an investment vehicle that involves the pooling of funds (resources). In company structure terms, they often operate in the UK as Limited Liability Companies, which are sometimes known as LLCs.

There’s no agreed market or sector in which investment can be expected. Instead, hedge funds tend to invest in a diverse range of opportunities. Some hedge funds seek to out-perform particular markets, while there is often a clear aim to produce a positive return on investment, irrespective of wider market conditions.

In general terms, hedge fund ownership cannot be purchased by members of the public. Fund managers will, on some occasions, actually choose to invest some of their personal wealth in the hedge fund. Doing so clearly gives them a very real and personal interest in the outcomes of their investments.

Around 80% of the hedge funds in Europe are operated from the United Kingdom, where they are required to be regulated by the Financial Conduct Authority. There have been more recent talks about changes to EU-wide regulation.

Given the way in which they are managed, there is not usually any requirement for hedge fund managers to disclose the performance results that are associated with their investments. This has led some to claim that there is simply too much secrecy surrounding them, making it difficult to identify how they compare against peers.

To offset such concerns, some fund managers are happy to publicise performance details. There are also a number of magazines and journals that produce summary tables, enabling performance levels to be compared more easily.

As might be expected, the financial crisis of 2007 and 2008 did have a negative impact on the performance of hedge funds. There has been some evidence to suggest, however, that this sector still out-performed many alternative forms of investment, even during this period of time.