Investments, tenth edition

  Hedge Funds   

Like mutual funds,    hedge  funds    are vehicles that allow private inves-

tors to pool assets to be invested by a fund manager. Unlike mutual funds, however, hedge 

funds are commonly structured as private partnerships and thus subject to only minimal 

SEC regulation. They typically are open only to wealthy or institutional investors. Many 

require investors to agree to initial “lock-ups,” that is, periods as long as several years in 

which investments cannot be withdrawn. Lock-ups allow hedge funds to invest in illiq-

uid assets without worrying about meeting demands for redemption of funds. Moreover, 

because hedge funds are only lightly regulated, their managers can pursue investment strat-

egies involving, for example, heavy use of derivatives, short sales, and leverage; such strat-

egies typically are not open to mutual fund managers. 

 Hedge funds by design are empowered to invest in a wide range of investments, with 

various funds focusing on derivatives, distressed firms, currency speculation, convertible 

bonds, emerging markets, merger arbitrage, and so on. Other funds may jump from one 

asset class to another as perceived investment opportunities shift. 

 Hedge funds enjoyed great growth in the last several years, with assets under manage-

ment ballooning from about $50 billion in 1990 to just about $2 trillion in 2012. We devote 

all of Chapter 26 to these funds.     

 Mutual funds are the common name for open-end investment companies. This is the 

dominant investment company today, accounting for more than 90% of investment com-

pany assets. Assets under management in the U.S. mutual fund industry were approxi-

mately $13.5 trillion in early 2013, and approximately another $13 trillion was held in 

non-U.S. funds.