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A hedge fund is defined as a private investment portfolio usually structured as a limited partnership open to accredited investors charging an incentive based fee and managed by a general partner with every financial tool imaginable at hisher disposal It is comprised of a multitude of skill-based investment strategies with a broad range of risk and return objectives A common element is the use of investment and risk management skills to seek positive returns regardless of market definition In terms of structure they are largely unregulated Unlike a typical mutual fund which is regulated by the SEC even when the Dodd-Frank reform bill was passed in 2010 the SEC was not prepared for such a task It is against US securities law for a hedge fund to advertise its performance or hold itself out to the general public They also charge higher fees than traditional long-only managers Typically the fees consist of a management fee between 1-3 per annum and an incentive fee usually ranging from 10-25 Hedge funds also impose certain liquidity restrictions that limit restrictions that limit the ability of investors to exit Background on Hedge Fund Strategies There are approximately 14 distinct investment strategies used by hedge funds each offering different degrees of risk and return It is evident that not all hedge funds have the same risks- and their risks vary with the strategies that they employ Hedge funds employ four basic techniques short selling leveraging diversity and hedging It is therefore necessary to have an understanding of hedge fund strategies and techniques to know about their risks and return potential Hedge funds face certain implementation pitfalls due partly to the nature of their trading strategies Those whose strategies entail high turnover and aggressive trading on short-lived information are the most likely to incur heavy transaction cost As hedge fund managers develop and refine methods they focus most of their attention on the formulation of an investment strategy and
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