Hedge funds combine funds from numerous depositors to invest in a wide variety of assets. These types of investments are not usually available to the general public. Hedge fund investors typically are institutions or wealthy individuals who can afford to make a large deposit.
Hedge Fund Features
Although the Securities and Exchange Commission recognizes that hedge funds pose a higher risk to investors, it exerts fewer regulations on them than it does for a traditional mutual fund. Hedge funds use more flexible investing strategies and engage in certain types of speculative investment practices that mutual funds generally avoid. Hedge fund managers still have a fiduciary duty to their investors as well as the same fraud prohibition adhered to by mutual funds and other market investments. Not all hedge funds must register with the SEC. The fund manager can invest the money from the initial public offering at his discretion. If he succeeds in making a profit, the share price of the hedge fund will increase.
The number of available shares in a closed-end fund is fixed. You must trade with other investors on the open market if you want to buy or sell shares. This keeps the same amount of money in the investment pool for the fund manager to use to generate a profit.
Closed-end funds allow the manager to invest in long-term assets. Open-end funds permit investors to sell their shares back to the fund company. This forces the fund manager to keep a certain amount of cash or easily liquidated assets on hand to cover these trades.
- Medioimages/Photodisc/Photodisc/Getty Images