Hedge fund
InvestingDefinition
A private, lightly-regulated investment fund that can use aggressive strategies most mutual funds cannot (shorting stocks, heavy borrowing, complex derivatives, etc.). Only wealthy investors (over $1M net worth or $200K income) are allowed in.
Hedge funds charge what is called '2 and 20': 2% of your money every year plus 20% of any profits they make. After those fees, most hedge funds underperform a plain index fund. A famous 10-year bet by Warren Buffett against a basket of top hedge funds was won by a cheap S&P 500 index fund by a wide margin.
Hedge funds charge what is called '2 and 20': 2% of your money every year plus 20% of any profits they make. After those fees, most hedge funds underperform a plain index fund. A famous 10-year bet by Warren Buffett against a basket of top hedge funds was won by a cheap S&P 500 index fund by a wide margin.
Example
A hedge fund charging 2 and 20 earns 10% gross in a year. After fees, the investor keeps about 6%. Meanwhile a plain S&P 500 index fund with a 0.04% fee that earned 9% leaves the investor with 8.96%.