Funds & wrappers
Hedge fund
A lightly regulated private fund able to use leverage, shorting and derivatives freely.
How it works
Hedge funds pursue a very wide range of strategies. The label describes a legal structure and fee arrangement rather than any particular approach.
Access is restricted to institutions and wealthy individuals, minimums are large, and money is typically locked up for a period.
Where it misleads people
Reported hedge fund index returns are badly affected by survivorship and backfill bias: funds report voluntarily, and failed ones stop reporting. Published averages overstate the real experience.
Related terms
- Performance feeAn additional charge taken as a share of returns above an agreed threshold.
- Survivorship biasThe distortion caused by measuring only the things that made it, and ignoring the ones that failed.
- GatingA fund limiting or suspending withdrawals because it cannot sell holdings fast enough.
- LeverageUsing borrowed money to increase exposure beyond what your own capital would buy.
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