Hedge Funds

Hedge Funds — Investment Vehicle Characteristics Why this matters on the exam: Hedge funds appear in Section II (Investment Vehicle Characteristics, ~25% of the exam) as part of the "Alternatives" category. Expect 2–4 questions testing your ability to distinguish hedge funds from other pooled vehicles and to recognize which investors can legally access them. --- ## What Is a Hedge Fund? A hedge fund is a privately organized pooled investment vehicle that uses a broad range of strategies — including leverage, short selling, derivatives, and concentrated positions — to pursue absolute returns, regardless of overall market direction. Unlike mutual funds, hedge funds are largely exempt from the registration requirements of the Investment Company Act of 1940, which is precisely what allows them to use these aggressive tactics. The word "hedge" is somewhat historical — many modern hedge funds do not hedge at all. They may take on substantial risk to generate outsized returns. --- ## Key Characteristics ### Structure and Access | Feature | Hedge Fund | Mutual Fund | |---|---|---| | Registration (Investment Company Act) | Generally exempt | Registered | | Investor access | Restricted (accredited/qualified) | Open to public | | Liquidity | Limited (lock-up periods) | Daily redemption | | Transparency | Low (minimal disclosure) | High (prospectus, daily NAV) | | Pricing | Periodic NAV (not daily) | Forward priced daily | | Leverage/short selling | Permitted and common | Restricted | | Typical fee structure | "2 and 20" | Expense ratio only | ### Who Can Invest? Because hedge funds avoid public offering registration, they rely on exemptions under securities law. Access is restricted to sophisticated investors: - Accredited Investor: Generally an…