About Hedge Funds: What You Need to Know

Hedge funds are privately organized investment entities that commonly take both long and short positions in securities and derivatives contracts and employ the use of financial leverage.

Hedge funds are usually organized as limited partnerships or limited liability companies and have strict minimum investment and net worth requirements.

Equity Hedge Funds: Common strategies are market neutral (zero beta portfolios), net short, and long/short.

Fixed Income Hedge Funds: May use leverage to generate returns on yield spread relationships.

Performance Measurement Challenges

Historically, hedge funds are thought of as investments designed to generate positive returns in both bull and bear markets.

Because of their unique characteristics, it is difficult to measure hedge fund performance with traditional benchmarks and risk-adjusted return measures.  Some of these unique characteristics include:

  • In the large universe of hedge funds, there are many styles and sub-styles.
  • Limited public disclosure requirements for funds.
  • High portfolio turnover.
  • Large and/or changing degrees of leverage.
  • Style drift.

Hedge Fund Benchmarks

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