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What is a hedge fund? As a small investor is this investment of interest to me?

Hedge funds are professionally managed portfolios of various securities that have fewer restrictions than mutual funds. Hedge fund mangers can sell equities short, use derivatives extensively and borrow – practices that are restricted in mutual funds. The ability to sell short makes it possible for them to make money in bear markets.

Hedge funds are marketed as being protected from market volatility or even having the potential to make money in any environment. Hedge funds, however, are loosely regulated and sometimes highly leveraged, making them a very risky investment. The most famous example was Long Term Capital Management, the U.S. hedge fund that buckled under the Asian crisis of 1998. Hedging strategies range from conservative to aggressive. The conservative type of hedge fund has the preservation of capital as its main goal. This is achieved by holding a combination of investments that offset each other’s risk. These funds might appeal to a client worried about market volatility. Aggressive hedge funds employ leveraging strategies, which magnify gains or losses of the underlying markets. Although short selling enables a manager to profit from a market decline, the losses are theoretically unlimited should the market go up. Traditionally, these funds are marketed to sophisticated investors with high net worth. Minimum investment requirements are usually between $90,000 and $150,000. In recent years, however, there has been a move to turn hedge funds into a mass-market investment product. This effort has met with mixed success since hedge funds remain high risk and in fact will suffer from reduced returns if the hedge fund manager does not correctly anticipate the direction of the market, the value of a commodity or the value of a particular currency.