What Does Hedge Fund Mean?
A hedge fund is an alternative investment option available to big investors such as institutional investors or high net worth individuals, usually those with significant assets. A hedge fund is an unregulated pool of securities, typically set up as a partnership or a very specialized and volatile open-end investment firm. These funds try to capitalize on mergers and acquisitions.
Divestopedia Explains Hedge Fund
Hedge funds are similar to mutual funds, but the minimum required investment is quite large and they are not as regulated. While they do invest in traditional securities, such as commodities and stocks and bonds, they are better known for riskier (more sophisticated) investments. Hedge funds use merger arbitrage.
When a firm becomes distressed, its investors often react by selling these securities at a low price. These distressed securities provide an attractive investment option to sophisticated investors who are willing to accept risk for a bargain. Hedge funds believe that the firm could reorganize itself and be successful and the value of its distressed securities will increase. This allows them to make profit. They even try to influence reorganization by injecting new capital in the firm in exchange for equity. Hedge funds use leverage. In other words, they invest borrowed money. This creates a greater risk of loss, but also increases their return potential. Hedge funds that take long term macro economic risks are called global macros.