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A hedge fund is an investment pool contributed by a limited number of partners (investors) and operated by a professional manager(s) who employ different strategies to earn an active return, or alpha, for their partners.

A hedge fund isn’t a specific type of investment. Rather, it is a pooled investment structure set up by a money manager or registered investment advisor and designed to make a return.

This pooled investment structure is often organized as either a limited partnership or a limited liability company.

A hedge fund is an unregulated investment fund and various types of money managers, including commodity trading advisers (CTAs), that share (a combination of) the following characteristics:

  • Often follow a relatively broad range of investment strategies that are not subject to borrowing and leverage restrictions (with many of them using high levels of leverage).
  • Often have a different regulatory treatment from that of institutional investors and typically cater to high net worth individuals or institutions.
  • Often hold long and short positions in various markets, asset classes and instruments.
  • Frequently use derivatives for position-taking purposes.