Hedge funds are actively managed investment funds that invest mainly in conventional asset classes and pursue a range of investment strategies and approaches not open to traditional active managers. Hedge fund managers often aim to achieve positive returns in all market conditions, and sometimes seek to preserve investors' capital. In contrast, traditional managers seek to outperform a well-defined, market-based benchmark. Hedge funds claim their returns depend on the return-generating skills of the managers and therefore justify the high fees charged.
NOT AN ASSET CLASS
Hedge funds should not be regarded as a distinct asset class. Rather, they should be regarded as alternative active management strategies in traditional asset classes. Some of the characteristics that distinguish them from asset classes are described next.