The Basics of Hedge Fund Investing

This chapter discusses the basics of hedge fund investing, including defining alternative investments, understanding the characteristics and structures of hedge funds, and comparing them to mutual funds. “Alternative investments” is a term used to describe non-traditional asset classes. Traditional asset classes include stocks, bonds, commodities, and foreign exchange. Alternative investments include real estate funds, private equity, venture capital, managed futures funds, hedge funds, and sometimes products that invest in hard assets such as timber, land, or artwork. The chapter provides an overview of some of the most common hedge fund strategies. Hedge funds are the newest form of alternatives. Their business models are also not as stable, well developed, or mature as those associated with traditional investing or even earlier forms of alternatives, such as real estate and private equity. The chapter further evaluates how to use monthly returns reported to investors to measure performance and how leverage, short selling, and derivatives used in hedge fund investing impact results.