Fund of Funds Investing: A Roadmap to Portfolio Diversification

Chapter 2. A Hedge Fund Is What?

Although this book is not intended to be a primer on hedge funds, one of the first tasks is for us to define the term hedge fund.

While there is no universally accepted definition, the term hedge fund generally refers to an investment vehicle that invests in a wide range of securities and other assets, and is not registered as an investment company under the Investment Act of 1940 (the 40 Act). As such, the hedge fund does not issue shares or units such as mutual funds to investors but instead offers limited partnership interests. Investments in hedge funds are not sold in a public offering like mutual funds, but through private placement offerings to investors that meet specific income and asset levels as defined by the 40 Act.

However, in light of the credit crisis of 2008 and the Madoff fraud, Congress is contemplating changing some of the requirements and guidelines mentioned previously and subsequently. At the time of publication, nothing had been made firm, and we don't know where things will end up. One thing is for sure: things will change sometime before the end of 2010. We don't know when it will come or what it will be, but we do know that things will change, maybe for the better, but quite possibly for the worse.

THE CREDIT CRISIS AND HEDGE FUNDS

It is important to understand the mechanics of hedge fund investing as they were in the early part of 2009.

Hedge funds are open to accredited investors and super-accredited investors that meet an ...