GLOSSARY OF TERMS
The current economic crisis has brought these esoteric terms into mainstream conversation.
| TERMS | | Hedge Fund | | |
Hedge Funds are private investment funds that use investments from pension funds, state retirement funds and wealthy individuals. The Hedge Fund managers use sophisticated techniques like leverage and short selling of securities to try to achieve higher returns than the stock market.
Hedge funds are a bit like exotic mutual funds, but they carry bigger risks, and potentially, greater rewards. They’re similar to mutual funds in that hedge fund managers pool investors’ money and re-invest it in hopes of getting a positive return. But that’s where the similarity ends.
In a world where securities are tightly monitored and regulated, hedge funds are not required to register with the Securities Exchange Commission (SEC) or to file periodic reports. Hedge fund managers aren’t even required to disclose much about what they’re doing with investors’ money—and what they’re doing is investing in everything from stocks and futures to commodities and currencies, real estate, art, even website domain names, along with other highly speculative and risky investments. This leaves the investor virtually unprotected by any regulatory body.
Hedge Funds have been highly suspect during the recent financial crisis. In fact, in September 2008, the U.S. Securities and Exchange Commission temporarily banned the short sale of some stocks. In a short sale, a trader borrows shares and then sells them immediately in the hopes they can be bought back later at a cheaper price. The SEC now requires Hedge Funds to disclose which shares are being bought short, though those reports won't be made public.
In November, some of the most high profile Hedge Fund managers were questioned by Henry Waxman, Chairman of the House Oversight and Government Reform Committee to determine the extent to which Hedge Funds contributed to the disruption of financial markets.
By some estimations Hedge Funds currently have close to $3 trillion assets under management.
See our special report on Hedge Funds (will add a link when we are able to post the article)
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