A stock analyst sits at his desk

What is a Hedge Fund?

A hedge fund is used to increase wealth by investing in things that can be later sold for profit. Whether it's made up of currency, stocks, or even other hedge funds, people who manage hedge funds make money off their client’s money. If this seems like a nonsensical money scheme of the elite, read on for some clarity. 

What is a hedge fund?

Compare the hedge fund to a mutual fund. The concept is the same: with both types of funds, you put your money into the fund, where it is then invested for you and you later receive the profits. The key difference is how the investors grow your money. Whereas mutual funds are put into low-risk investments, hedge fund money is put into very risky investments.

How do I start a hedge fund?

Hedge funds aren’t available to just anyone. To start a hedge fund, you need to have several millions. Alternatively, wealthy companies or institutions such as college endowments and big-time banks can invest in a hedge fund, which is comprised of millions (or even billions) of dollars from a spread of clients. From there, it's in  hands of the hedge fund manager.

What does a hedge fund manager do?

Hedge fund managers invest in whatever they believe will yield the most profit, even if there’s a high risk involved. Most managers have attended the best business schools or carry an Ivy League pedigree, in addition to a solid background in trading and investments. Before investing a client’s money, they take a “management fee” of around 2%; upon returning the annual profits to their client, the hedge fund manager takes 20% of the profits.

The day-to-day life of a hedge fund manager isn’t as glamorous as you would imagine. They can't just spend their day rolling in their clients' millions. There’s a lot of analysis, risk-management planning, and financial predictions. Depending on the size of the fund, the manager may devote time to meeting with the client; if the fund is larger, the manager will delegate tasks to analysts and junior managers.

A hedge fund manager’s strategy varies among the different hedge fund companies. Global macro investing is one of the more common methods used to grow hedge funds, and it’s usually executed through currency hedging. When it comes to currency hedging, you’re essentially playing a waiting game. Let’s look at George Soros for an example. Soros, the richest hedge fund manager as of 2015, is best known for short selling his investment in the British pound right before value of England’s currency plummeted. Soros gained $1 billion and the title of “The Man who Broke the Bank of England”.