Overview of Hedge Funds
Hedge fund is a relatively new type of investment product in the sense that it was first invented by Alfred Winslow Jones back in 1949. These are called hedge funds because they use a variety of techniques such as short sales and options to hedge or protect their investment positions from downside risks. In the context of the world of investing, to hedge means to reduce the risk of losing a bet or wager by availing of other techniques to either counterbalance or minimize probable losses. This concept is very strikingly similar to making side bets in a poker or blackjack card game, the intent of which is to reduce your losses if the dealer or banker wins the hand.
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Hedge funds are classified under the same alternative investments category as private equity, venture capital, private debt, and real estate investments. They are termed “alternative” as they do not fall under the definition and purview of so-called traditional investments such as mutual funds. Traditional funds are those funds that invest in widely publicly-held liquid investments in equity stocks and fixed-income securities. Hedge funds have four distinct characteristics that separate them from ordinary funds: they can use derivatives, they can use “short sales” (to be explained later in greater detail), they are allowed to maximize their potential returns through leverage and they can also buy “real assets” such as real estate properties and even real companies (as opposed to merely buying or owning the stocks of these companies).