A privately offered pooled vehicle, usually a limited partnership, that faces few portfolio restrictions and charges a management fee plus a share of profits.
The defining features are structural rather than strategic: restricted investor eligibility, limited redemption rights, wide latitude to use leverage, shorting and derivatives, and a performance-based fee. Strategies range from market-neutral equity to global-macro to distressed credit, with little in common beyond the wrapper.
Because eligibility is restricted to institutions and wealthy individuals, disclosure requirements are lighter than for retail funds. Investors are expected to perform their own due diligence on valuation policy, service providers, leverage and key-person risk.
Aggregate performance data is unreliable. Reporting is voluntary, funds that fail stop reporting, and indices backfill successful histories, so published hedge fund index returns carry meaningful survivorship-bias. Judge an individual manager's audited record, not the category.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Margin and leverage. A $5,000 deposit can control a $100,000 position, which is 20:1 leverage. Because the loss is measured on the full $100,000, a 2.5% move against you halves the deposit and brings a margin call, and a 5% move uses all of it.
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