Investment Banks, Hedge Funds, and Private Equity, 2nd Edition

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Overview of Hedge Funds

In the United States, the Securities and Exchange Commission (SEC) has stated that the term hedge fund “has no precise legal or universally accepted definition.”¹ But most market participants agree that hedge funds have the following characteristics: (1) almost complete flexibility in relation to investments, including both long and short positions; (2) ability to borrow money (and further increase leverage through derivatives) in an effort to enhance returns; (3) minimal regulation; (4) somewhat illiquid since an investor’s ability to get their money back is restricted through lock-up agreements (that may prevent any liquidity during the first one or two years of a hedge fund’s life) and quarterly disbursement limitations ...