Equity Hedge Fund Definition

Equity Hedge Funds

What is an Equity Hedge Fund? | FAQ Definition

After running this blog for several years, I come across many familiar questions so I am putting together a frequently asked questions page to help answer some of these basic hedge fund questions as well as posting the answers here. Last week, we looked at the definition of event-driven hedge funds.  To start, here is a quick question and answer on what is an equity hedge fund?  For more hedge fund questions and answers please see our FAQ page here.

Question: What is an equity hedge fund and how is it different from other equity investment funds?  Well, there are a number of differences between hedge funds and other equity investors, the highlights are: the regulation, structure, sophistication, ability to trade in exotic strategies, and leverage, to name a few.  

Hedge funds have been historically exempt from the Investment Act of 1940, unlike mutual funds and other registered investment advisors.  Hedge funds also use a limited partnership structure with the 2 and 20% compensation model and invests on behalf of accredited investors.  Hedge funds are often more sophisticated than your typical equity investor as it is their job to produce alpha and its investors expect the management team and analysts to be a cut above the rest.  Hedge funds often control huge pools of assets under management and trade very frequently, which makes them ideal clients for prime brokers and investment bankers.  This means that a broker's first call for a new trading strategy, a bit of industry news or the latest research is often to his/her hedge fund clients.  Many hedge funds that benefited from the use of credit default swaps, for example, did so with a new strategy that was very complicated, risky and  not available to the everyday investor.

An equity hedge fund, in short, is a hedge fund that buys ownership stakes in companies, often borrowing significantly to boost potential returns through the use of leverage.  Hedge funds may specialize in a particular area like technology stocks, or a company size like small or large cap equities.  These funds will also sell short, meaning they will borrow shares from a prime broker, sell the shares and then buy them back to return to the lender, pocketing the difference when the shares decline and sometimes suffering losses if the shares appreciate in value before they can be repurchases.  This ability to be both long and short enables hedge funds to ideally beat the market irrespective of whether stocks are advancing or declining.  This is a huge benefit to investors who want to hedge their other investments and one of the main attractions to hedge funds.  

For more comprehensive training on hedge funds including book, audio and visual training resources, please see our hedge fund training program.  It is the oldest, most popular certification program specifically for hedge fund professionals.  Learn more about the Certified Hedge Fund Professional here.  

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