Forming a Hedge Fund

Definition of a Hedge Fund

A “hedge fund” is a private investment vehicle organized for the purpose of pooling investors’ assets. The sponsor of the hedge fund, commonly referred to as the hedge fund manager, invests the hedge fund’s assets pursuant to a predetermined investment strategy. It is argued that in the absence of such a pooling vehicle, an investor, on its own, would not be able to diversify its assets or have the resources to monitor, evaluate and implement the investing and trading strategies to be engaged in by the manager. Although historically the defining characteristic of a hedge fund was to “hedge” against market risk and volatility, hedge funds today apply a variety of investment techniques. Unlike mutual funds, which are highly regulated, hedge funds: (i) are not required to redeem investors’ assets within seven days from the date on which it receives a notice for redemption from an investor; and (ii) may take illiquid positions without limitation and may engage in leveraged transactions with greater freedom.