TLDR:
A hedge fund is an alternative investment fund that uses pooled capital from accredited investors to pursue high-return strategies including leverage, short selling, derivatives, and arbitrage, typically targeting absolute returns.
Hedge Fund Strategies
Hedge funds employ a wide variety of investment strategies that can be broadly categorized as: (1) Long/Short Equity — buying undervalued stocks while shorting overvalued ones; (2) Global Macro — taking large positions based on macroeconomic trends and geopolitical events; (3) Event-Driven — capitalizing on corporate events like M&A, bankruptcies, or spin-offs; (4) Arbitrage — exploiting price discrepancies across markets or securities; and (5) Quantitative — using algorithmic models to identify and execute trades. The ability to use leverage, short selling, and derivatives distinguishes hedge funds from most other investment vehicles.
Hedge Funds vs. VC
Hedge Fund Strategies
Hedge funds employ a wide range of strategies: long/short equity (taking offsetting positions to capture relative-value opportunities), global macro (betting on macroeconomic trends in currencies, rates, and commodities), event-driven (M&A arbitrage, distressed debt, activist positions), quantitative (algorithmic strategies including statistical arbitrage and managed futures), and credit-focused strategies. Many large hedge funds operate multiple strategies in parallel through specialized portfolio teams.
Fee Structures and Performance
The classic hedge-fund fee structure is “2 and 20” — 2% annual management fee plus 20% of profits above a high-water mark. Over the past decade, fee compression has reduced these levels significantly for all but the highest-performing funds, with many funds now charging 1.5/15 or lower. Hedge funds typically require accredited or qualified-purchaser status from investors and impose lock-up periods limiting withdrawals.