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What Is A Hedge Fund? A Jargon-Free Guide

If you’re confused about the question “what is a hedge fund?” you are not alone. Part of their allure is their exclusivity and secrecy.

A hedge fund is a partnership between a professional fund manager and investors (often referred to as limited partners).

What Is A Hedge Fund?

While there are hundreds of strategies employed by hedge funds to generate returns for their investors, most can be grouped into four main categories

Hedge Fund Strategies

Hedge funds implementing a global macro strategy look at the big picture economic and political trends worldwide and attempt to capitalize on these large-scale ideas.

1. Global Macro Strategy

A directional strategy hedge fund uses market trends and directional market movements to identify equities or other securities.

2. Directional Strategy

An event-driven hedge fund strategy seeks to identify risks and opportunities in specific events and make trades that pay off if those risks or opportunities are realized.

3. Event-Driven Strategy

A relative value strategy will attempt to take advantage of price discrepancies between securities, otherwise known as arbitrage. Investopedia defines arbitrage as “the simultaneous purchase and sale of the same asset in different markets to profit from tiny differences in the asset’s listed price.

4. Relative Value (Arbitrage) Strategy

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