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What is a Hedge Fund?

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A hedge fund is defined as an alternative investment vehicle. A hedge fund pools funds in a manner that utilizes different strategies which are discussed in detail in a moment. The money typically pooled by a hedge fund comes from accredited individuals as well as institutional investors. A hedge fund often involves the implementation and utilization of focused risk-management techniques as well as complex portfolio construction.

Finance Degree and Employment with Hedge Funds

A finance degree permits a person the ability to have considerable career variety. Examples of career options with this type of degree include:

  • financial analysis
  • accounting
  • economics
  • investment banking
  • real estate
  • entrepreneurship

Armed with this degree with a focus on financial analysis permits a person the opportunity to work with mutual funds, bonds, commodities, stocks, and hedge funds.

See our ranking of the 30 Most Affordable Online Bachelor’s In Finance.

Primary Hedge Fund Categories

Generally speaking, hedge funds typically are classified into one of four categories. There do exist some other types of hedge funds. However, nearly all fall within these categories. These are:

  • global macro
  • directional
  • event-driven
  • relative value or arbitrage

A hedge fund that utilizes a global macro strategy takes what are described as “sizable positions” when it comes to stock, bond, and currency holdings and markets. These hedge funds take these positions based on an analysis of global economic events as a means of generating a risk-adjusted return on investment.

When a hedge fund uses a direct investment strategy, the fund considers market movements, market trends, and noted inconsistencies to select stocks. Stock picks are made in this manner across different markets.

An event-driven strategy utilized by a hedge fund is one in which risk analysis and determination of investment opportunities are made based on a particular event. These are classified as corporate transactional. These corporate transactional events include:

  • consolidations
  • acquisitions
  • recapitalizations
  • bankruptcies
  • liquidations

Finally, a relative value or arbitrage is used by certain hedge funds. These strategies are focused on a hedge fund taking advantage of discrepancies in price between different securities or stocks.

History of Hedge Funds

The history of hedge funds begins in 1949 when the first fund of this type was launched in the United States by what was then known as the A.W. Jones & Co. Within about 10 years, hedge funds outperformed the better known and more widely utilized mutual funds. By the mid-1960s, hedge funds outperformed mutual funds by double digits.

During the 1970s, hedge funds did not perform nearly as well. By the 1980s and 1990s, hedge funds became hot yet again. Into the 21st century, the number of hedge funds in existence increased. By 2015, there were over 10,000 hedge funds in existence. A year later, hedge funds began a bit of decline, according to Investopedia.

As noted at the start of this article, a finance degree can be beneficial for a career in a variety of settings. This includes employment in challenging environments, including that of a hedge fund.