What is a hedge fund?

A hedge fund usually refers to a type of equities investment fund that holds investments which are both “long” and “short” positions.

Long Positions

A long position is a holding that the investment firm believes will rise in value. These positions are established by simply purchasing the shares on the market.

Short Positions

A short position is a holding that the firm thinks will fall in value.

Short positions are created by “borrowing” the shares from other holders (utilising a market mechanism established for this purpose). The borrowed shares are then sold with the objective of buying the shares back in and returning them to the lender when the share price has fallen.

The difference between the sale price and cheaper repurchase price is retained by the firm as the profit on the position.

The expression ‘hedge fund’ has expanded these days outside the area of listed equities to sometimes include investments in other asset classes or to involve share investing in a particularly incisive and concentrated manner utilising a high conviction approach — such as allocating 50% of its available investment capital to its 5 best ideas.

To summarise, you could say that “a hedge fund is a pool of money contributed by investors and run by a fund manager whose goal is to maximise returns and minimise risk.