Hedge funds are private investment vehicles that are offered and managed by professional investment firms, usually set up as LLCs, LLPs or an entity with a similar structure. Complex investment strategies are utilized by the managers of these funds to maximize return for risk capital pooled from wealthy individuals and institutions.
As a rule, these types of funds require large initial minimum investments. That makes them open only to wealthy, accredited investors. In addition, investors in such funds may have limited opportunities to withdraw their capital once it has been added to the hedge fund since a sizeable and reliable pool of capital allows hedge fund management to use their leverage for savvier investing while weathering account drawdowns more easily.
Hedge funds got their name from Alfred W. Jones who coined the phrase “hedged fund” in 1949 when he created an instrument that focused on taking long-term stock positions while selling other stocks short, as a way of managing risk. This strategy was also used in the 1920s, but the term did not gain traction at that time. Hedge fund success attracts wealthy investors with risk capital, allowing hedge fund managers to explore more creative and often complex investment strategies.