A Guide to Starting Your Hedge Fund

Chapter 2What Is a Hedge Fund?

Ever wonder why fund managers can't beat the S&P 500? Cause they're sheep and the sheep get slaughtered.

Michael Douglas as Gordon Gecko, Wall Street

I Already Know What a Hedge Fund Is

If you are reading this book, you are likely already familiar with hedge funds. Accordingly, you might wonder why this chapter was included. At one level, this chapter was written for those new to the hedge fund universe who may find themselves reading this book. For these readers, this chapter can serve as an informative standalone section, or as a foundation for the more technical topics that will be covered later.

We think this chapter is also important for readers with more experience in dealing with hedge funds. Although the factual information itself may not be new to you, we try to present the information in a way that conveys the importance of perspective, which is a theme throughout this book.

Depending on your perspective, a hedge fund can represent different things. For the trader that recently started a hedge fund, it is more than just a technical definition. It represents a new business venture where very likely a large portion of a hedge fund founder's personal wealth and all of their personal reputation is invested. For the university endowment or asset manager who has placed money with a hedge fund, it can represent an investment in an asset class. To a lawmaker or regulator, a hedge fund is a nebulous, sometimes polemical component of the financial ...