A description of a hedge fund is an investment term that is used to describe a private pool of investor's money that is put together to invest in things like debt, shares and other commodities. The person chosen to oversee how the fund is used is called a hedge fund manager. They are tasked with actually investing the group's funds in whatever investment plan the came up with. The original purpose of using a hedge fund as a means of investment was to lessen the risk, or to "hedge" the risk involved with investing. To do this, a variety of investment options are utilized rather than just one. The most common investment methods that are commonly associated with hedge funds are derivatives and short selling.
A description of a hedge fund differs from a mutual fund in that a mutual fund is heavily regulated with strict rules in place that deal with accounting and taxation rules. A hedge fund is not subject to these regulations. With a hedge fund, it does not have to redeem the assets of the investors' in a seven day period from the time an investor gives a notice for redemption. A hedge fund also may use illiquid positions without placing a limit on them. It can also allow for greater freedom when dealing with leveraged transactions.
A hedge fund's structuring will depend greatly on who the people are that are investing. A description of a hedge fund that will be used to help those located outside of the US borders profit will be structured one way. While a hedge fund that will be used to help those located inside the US will be structured another way. A large majority of hedge funds will be found to be structured as a master-feeder money system. Being structured like this allows an investor to put their money into a feeder fund. The feeder fund in turn will have all of its assets invested into the master fund. Many different feeder funds can be put into a larger pool in the master fund.
Another description of a hedge fund is that it is often setup to keep the taxes paid by investors to a minimum. The different feeder funds can be made up of various offshore corporate funds, unit trusts, and limited US partnerships. The hedge fund manager may or may not decide to keep their interest in the fund. The investment direction taken by a hedge fund is voted on by the fund's board of directors.
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