# Hedge Funds > Hedge funds are private investment pools using flexible strategies, leverage and short selling. Learn the main strategies, fee structures, regulation and risks. Source: https://learn.tradelabsai.com/industry/hedge-funds/ Track: The Trading Industry · Level: Intermediate · Updated: 2026-10-03 Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice. Cite as: TradeLabs Learn, "Hedge Funds", https://learn.tradelabsai.com/industry/hedge-funds/ A hedge fund is a privately offered investment fund that can use a wide range of strategies, including short selling, leverage, derivatives and concentrated bets, that traditional mutual funds often cannot. The name comes from early funds that hedged their stock holdings with short positions, starting with Alfred Winslow Jones's fund in 1949. Today hedge funds manage trillions of dollars for wealthy individuals, pension funds, endowments and sovereign wealth funds, with strategies ranging from conservative arbitrage to aggressive macro bets. ## Key features | Feature | Detail | |---|---| | Investors | Accredited investors and institutions, not the general public in most countries | | Strategies | Flexible: long and short, leverage, derivatives, any market | | Regulation | Lighter than public funds; large US managers register with the SEC and file reports such as Form PF and 13F. See [Position Limits and Regulatory Reporting](https://learn.tradelabsai.com/industry/position-limits/) | | Liquidity | Redemptions often monthly or quarterly, with notice periods and lockups | | Fees | Management fee plus performance fee | | Structure | Usually limited partnerships, often with offshore feeder funds | ## The main strategies | Strategy | Approach | Lesson | |---|---|---| | Long short equity | Buy undervalued stocks, short overvalued ones | [Short Selling](https://learn.tradelabsai.com/markets/short-selling/) | | Equity market neutral | Balance longs and shorts to remove market exposure | [Statistical Arbitrage](https://learn.tradelabsai.com/strategies/statistical-arbitrage/) | | Global macro | Bet on rates, currencies, commodities and indices based on economic views | [Macro Trading](https://learn.tradelabsai.com/strategies/macro-trading/) | | Managed futures (CTAs) | Systematic trend following in futures | [Trend Following](https://learn.tradelabsai.com/strategies/trend-following/) | | Event driven | Mergers, bankruptcies, spin offs | [Event-Driven Trading](https://learn.tradelabsai.com/strategies/event-driven-trading/) | | Relative value and arbitrage | Exploit pricing differences between related securities | [Arbitrage Strategies](https://learn.tradelabsai.com/strategies/arbitrage-strategies/) | | Credit | Corporate bonds, distressed debt, structured credit | [Distressed Debt and Bankruptcy Trading](https://learn.tradelabsai.com/bonds-credit/distressed-debt/) | | Multi strategy | Many teams and strategies under one firm with central risk management | | | Quantitative | Systematic models across many securities | [Quantitative Trading](https://learn.tradelabsai.com/strategies/quantitative-trading/) | ## Fees The traditional model was "2 and 20": a 2% annual management fee on assets plus 20% of profits. Average fees have fallen over time, though top performing and multi strategy funds can charge more, sometimes passing through costs to investors. | Term | Meaning | |---|---| | High water mark | Performance fees are charged only on gains above the previous peak value | | Hurdle rate | A minimum return before performance fees apply | | Pass through fees | Some funds charge investors for costs such as staff and technology | **Example: How fees affect returns** A fund earns a gross return of 12% in a year on a $1,000,000 investment, charging 2% management and 20% performance fees. The management fee is $20,000. If the performance fee applies to gains after the management fee, the gain is $120,000 minus $20,000, or $100,000, and the performance fee is $20,000. The investor's net gain is $80,000, an 8% return. Fees took a third of the gross gain. Fee calculation details vary by fund. See [Measuring Returns and CAGR](https://learn.tradelabsai.com/portfolio/measuring-returns-and-cagr/). ## Famous funds and failures | Fund | Notable for | |---|---| | Bridgewater Associates | One of the largest hedge funds; known for its macro and All Weather strategies | | Renaissance Technologies | Quantitative pioneer; its Medallion Fund, closed to outside investors, has reported exceptional returns | | Long Term Capital Management | Collapsed in 1998 after leveraged bets went wrong; required a Federal Reserve organised rescue. See [The Collapse of LTCM](https://learn.tradelabsai.com/history/the-collapse-of-ltcm/) | | Amaranth Advisors | Lost about $6 billion in natural gas bets in 2006. See [Amaranth Advisors](https://learn.tradelabsai.com/history/amaranth-advisors/) | ## Risks for investors - **Leverage and concentration** can cause large losses. - **Limited liquidity:** money can be locked up or gated in crises. - **High fees** reduce net returns. See [Active vs Passive Investing](https://learn.tradelabsai.com/portfolio/active-vs-passive-investing/). - **Limited transparency** about positions. - **Operational and fraud risk,** as in the Madoff case, which posed as a hedge fund. See [Operational and Model Risk](https://learn.tradelabsai.com/portfolio/operational-and-model-risk/). Most hedge funds rely on one or more [Prime Brokers](https://learn.tradelabsai.com/market-structure/prime-brokers/) for financing, stock borrowing and custody. ## Frequently asked questions ### What is a hedge fund? A privately offered investment fund that uses flexible strategies, such as short selling, leverage and derivatives, mainly for wealthy and institutional investors. ### What does "2 and 20" mean? A fee structure of a 2% annual management fee plus a 20% share of profits. ### Who can invest in hedge funds? Typically accredited investors and institutions that meet income, wealth or professional criteria set by regulators. Next, learn about the wider fund industry in [Asset Management](https://learn.tradelabsai.com/industry/asset-management/). ## Continue learning - Next lesson: [Asset Management](https://learn.tradelabsai.com/industry/asset-management/) - Previous lesson: [Proprietary Trading](https://learn.tradelabsai.com/industry/proprietary-trading/) - Related: [Proprietary Trading](https://learn.tradelabsai.com/industry/proprietary-trading/): Proprietary trading means a firm trades its own capital for profit. Learn how prop firms work, the Volcker Rule, retail funded trader programs and their risks. - Related: [Asset Management](https://learn.tradelabsai.com/industry/asset-management/): Asset managers invest money for clients through mutual funds, ETFs, pensions and separate accounts. Learn the main types, how they earn fees and how they invest. - Related: [Prime Brokerage](https://learn.tradelabsai.com/industry/prime-brokerage/): Prime brokers give hedge funds financing, stock lending, clearing, custody and reporting. Learn the services, how prime brokers earn money and the risks. - Related: [Portfolio Manager](https://learn.tradelabsai.com/industry/portfolio-manager/): Portfolio managers decide what a fund holds and answer for its results. Learn the types of PMs, the daily work, skills needed and how people become PMs. - Related: [The Collapse of LTCM](https://learn.tradelabsai.com/history/the-collapse-of-ltcm/): Long Term Capital Management, run by star traders and Nobel laureates, lost $4.6 billion in 1998 and needed a Fed organised rescue. Learn what went wrong and why. - Related: [Active vs Passive Investing](https://learn.tradelabsai.com/portfolio/active-vs-passive-investing/): Active investing tries to beat the market; passive investing tracks it at low cost. Learn the evidence on performance, the impact of fees and how to choose.