The current buzz around hedge funds is obvious, but a lot of people wouldn’t be able to describe what one is - but do even the investors know?

What comes to mind when you think of funds? Money? Investing? Though there are many types of funds, each has its unique characteristics. Some are made for individuals while others fit large companies. Funds can have both high and low risk. Yet there is one type of fund that is gaining attention that many people have no clue about. It’s called a hedge fund.

Since its start in 1949, hedge funds have been gaining much popularity by investors around the nation. A hedge fund is a “private, unregulated investment fund for wealthy investors (minimum investments typically begin at US$1 million) specializing in high risk, short term speculation on bonds, currencies, stock options and derivatives”. So if this involves high risk, why would anyone want to invest so much money into it? Well, that answer is simple. Hedge funds are out to make profits, no matter what.

They are unaffected by the market. So even if the market was plunging, a hedge fund investor could still make big profit. Hedge funds can usually protect against declining markets by using different hedging strategies. These strategies differ with each type of hedge fund and investment style. But using these strategies would help bring profit even in a bad market.

Another reason for having hedge funds is hedge fund managers are paid a percentage based on the returns they get. This is appealing to them because they would rather not deal with mutual fund fees. Investors in hedge funds have the freedom to invest in stocks, without letting anyone know what stocks they have invested in. This has added some risk to the stock market. But of course how much of the stock market is under the hands of hedge funds, no one really knows. Some have estimated that it is some where near 50%.Others say there are 4,000 hedge funds that have power over $400 billion.

Though hedge funds have much advantages, just like anything else, they also have their share of disadvantages. An investor should not rely on his or her past knowledge of hedge funds and investing. It is imperative to study the field and how everything works.

Some advice can be taken from Kurt Schacht “While hedge funds are growing in popularity, they escape easy definition,” stated Kurt Schacht, executive director of the CFA (Centre for Financial Market Integrity). “While we all may think we are sophisticated investors, it’s imperative that investors make sure they fully understand the structure and attributes of the vehicle in which they are investing in.” Having a good understanding of hedge funds and how to make them work to your benefit is critical to the success of your business. Never underestimate the power of learning about the market in order to benefit from it. Don’t rely solely on hunches or feeling in the game of risk. When you do have a hedge fund, it requires you make an investment in knowing how the game is played. In the end, you’ve gotta give some to get some.