Hedge funds

A hedge fund is a pooled investment vehicle that runs strategies unavailable to ordinary mutual funds — using tools like short selling, leverage and derivatives, and often aiming for returns that do not simply track the stock market.

Strategy, not asset class

"Hedge fund" describes a structure and freedom, not a single thing they invest in. Common styles include:

• Long/short equity — buy undervalued stocks, short overvalued ones, aiming to profit either way.
• Global macro — bets on currencies, rates and economies worldwide.
• Event-driven — trading around mergers, bankruptcies and corporate events.
• Arbitrage — exploiting small price discrepancies, usually with leverage.

The original idea was to hedge — to reduce market risk and deliver returns independent of market direction. Many do; many do not.

The risk and return profile

• Return: highly varied. The best are exceptional; the average, after fees, has often struggled to beat a simple index. Skill and selection are everything.
• Risk: leverage and complexity can produce large, sudden losses; the strategy may be opaque.
• Liquidity: limited — lock-ups, gates and quarterly redemption windows with notice are standard.

Fees and access

Hedge funds also tend toward "2 and 20" fee structures. Historically they have been gated to accredited/qualified investors with high minimums. The retail-accessible equivalents are:

• Liquid-alternative funds — listed or daily-dealing funds that mimic hedge-fund strategies within regulated wrappers.
• Multimercado funds (Brazil) — flexible funds that can run macro, long/short and arbitrage strategies, widely available though the more aggressive ones target qualified investors.

Judge any hedge-fund-style product on its strategy, its fees and its track record through a full market cycle — not on its mystique.