UK Accounting Glossary
A hedge fund is a private investment vehicle for institutional investors and high net worth individuals. In the US, the SEC regulates the hedge fund sector minimally. The number of investors in a hedge fund is limited, and any individual investor in a hedge fund must be an accredited investor. Critically, the hedge fund avoids the SEC’s prohibition against the asset manager’s compensation being linked to fund performance, as is the case with, for instance, a mutual fund. For this reason, the hedge fund is often regarded as primarily an innovation in fund manager compensation. The hedge fund has no restrictions on investment strategy. The hedge fund can change its strategy at will, but many characterize themselves according to a fixed style they do best. Example hedge fund styles include short selling and risk arbitrage or “risk-arb”. Performance aside, the key measure of a hedge fund’s size is assets under management. For most individuals, investing in a hedge fund is only possibly indirectly, through a so-called fund of funds, which invests in multiple hedge funds.
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This glossary post was last updated: 9th February 2020.