What is a hedge fund?

Unlike a private equity fund, which calls committed capital and ties it up for years, a hedge fund takes cash up front and values its holdings often, so investors can redeem, subject to notice periods, lock-ups and gates. A performance fee is usually charged on gains above a high-water mark. In the US, hedge funds are generally sold only to institutions and wealthy investors. Strategies range from long/short equity to macro, credit and event-driven.

Say a $100 million fund charges 2% and 20%. It takes a $2 million management fee for the year, and if it gains $10 million, a performance fee of $2 million on that gain. Simple example. Terms vary by fund.

Investors use hedge funds for returns that depend less on markets rising, and their fees and liquidity terms work very differently from a private equity fund's.

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