Hedge Fund

Hedge Fund Meaning:
A type of investment fund. Hedge funds differs from other investment funds in that they typically: are open only to ‘sophisticate’ high-net-worth investors; partake in a much broader range of investment and trading activities; use leverage to greatly increase potential returns at the cost of greatly increased risk, and pay performance fees (typically 20% of profits) to their investments managers.

Hedge Fund Example:
‘Long-Term Capital Management’ was a hedge fund based in the United States that failed massively in the late 1990s. It specialized in bond arbitrage. Its positions were so highly leveraged that at one point its debt-to-equity ratio was 25:1.