Many people have heard the term hedge fund, but the vast majority of people have no idea what they are. Even people who have spent years investing in the stock market and other securities don’t really understand the concept of a hedge fund.

This is a type of limited company in which the fund manager acts as the general manager and the investors are the partners. The biggest difference between a hedge fund and a regular mutual fund is that hedge funds are not regulated. To avoid regulation, investors in the fund must be what are called “qualified buyers.” The requirements for this are detailed in the Investment Companies Law. In general, a hedge fund investor must have a net worth of $1,000,000 or an annual income greater than $200,000. The government established this requirement to protect small investors from the high risk of investing in hedge funds. By setting those requirements, you somewhat minimize the chance of someone losing all of their value.

Like any investment, the goal of this is to get the maximum possible return on investment. This is often done by investing in some of the riskier propositions such as distressed assets, derivatives, and junk bonds. If the strategy is successful, large profits can often be achieved. But one wrong decision can wipe out an entire portfolio. Two popular hedge fund strategies are short selling and high leverage. Short selling is basically betting that the market will move in one direction or another. Leverage simply means throwing a large amount of assets towards an investment in an attempt to affect it in a certain way.

Because these strategies are so risky, investors must fully understand how the management of their particular fund plans to invest capital. Unlike other investments that allow you to stand alone and leave the decisions up to the manager, hedge fund investors are expected to be very proactive and involved in the process. If things go really wrong, managers want to make sure you knew exactly what was going on every step of the way. If a manager seems reserved or controlling, perhaps you should look at another fund. For example, if you work in the health care industry and see a future where costs will continue to rise while profits shrink, would you like your fund manager to bet all your money on huge profits from the health care industry? health? This is part of being an informed investor.

One of the biggest advantages of this investment is the lack of regulation. Fund managers can invest in virtually anything they choose without regard to limits or security. They are famous for buying distressed properties and turning them into profitable real estate investments. This is also taking over struggling companies and helping to restructure them into profitable companies. Investments like these can lead to dramatic returns on investment capital that simply aren’t possible with other, safer forms of investing. Buying assets that are in debt allows a hedge fund to buy those assets for pennies on the dollar.

Hedge funds are one of the most lucrative opportunities in a depressed market. Opportunities to buy bankrupt companies and other assets abound, and with good research, assets can be reversed and revived.

With the possibility of making a lot of money, also comes the possibility of losing a lot. Hedge fund isn’t for everyone, but if you can take some risk, the rewards can be plentiful.