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The Little Book of Alternative Investments: Reaping Rewards by Daring to be Different by Phil DeMuth, Ben Stein

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Chapter Seven

The Ultimate Alternative Investments

Hedge Fundamentals

Having covered conventional investments, plus some alternative investments we don’t love as well as some that we do, we now turn to the alternative alternatives that will be our main focus from here on: hedge funds.

Say Whaa . . . ?

What is a hedge fund? AQR Capital’s Cliff Asness wrote the definition that no one has topped: “Hedge funds are investment pools that are relatively unconstrained in what they do. They are relatively unregulated (for now), charge very high fees, will not necessarily give you your money back when you want it, and will generally not tell you what they do. They are supposed to make money all the time, and when they fail at this, their investors redeem and go to someone else who has recently been making money. Every three or four years they deliver a one-in-a-hundred year flood. They are generally run for rich people in Geneva, Switzerland, by rich people in Greenwich, Connecticut.”

A hedge fund is an alternative investment vehicle available only to wealthy investors, such as institutions and accredited investors presumed to be financially numerate because they possess significant assets (currently defined as those with over $1 million in financial assets or who make more than $250,000 a year). They are not currently regulated by the U.S. Securities and Exchange Commission (SEC), a financial industry oversight entity, as mutual funds are. However, more regulation for hedge funds may be ...

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