I ve started learning about the market but I dont know what hedge funds are. Please explain
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If you’re good at investing or trading securities, you essentially have 4 options:
1. You trade for yourself and do whatever you want. It’s your money.
2. You can create a proprietary trading firm and hire employees that will help you trade **your** money. You don’t have any outside investors so you can avoid all the day-to-day headaches associated with that.
3. You can create a mutual fund. This allows you to accept money from the public but it’s **regulated**. People invest in mutual funds through their retirement accounts.
4. You can create a hedge fund. This allows you to accept money from outside investors but they have to be **accredited**. In other words, you can manage the money of wealthy people.
Compared to mutual funds, hedge funds can pursue more exotic investment strategies. They can long, short, trade options, invest in cryptocurrencies, trade the weather, gamble on who the next president is going to be among other things.
There are advantages to creating a fund versus managing your own money. When you manage your own money, *all of the risk is yours*. All of the gains and losses are yours. On the other hand, if you lose money as a hedge fund, the losses are spread across your investors. Hedge funds can charge their investors whatever they want to manage their money, but historically the going rate has been “2 and 20,” meaning an unconditional 2% management fee and 20% of annual profits (if there are any).
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