A hedge fund seeks to earn returns based on frequent stock trades that use valuation models to find and exploit undervalued stocks (which can be bought) and overvalued stocks (which can be sold).
Often American or British hedge funds cause unexpected changes in value in small stock exchanges of foreign countries, leading to complaints by local investors. In one case, the Long-Term Capital Management firm received favoritism by American government officials to rescue it from financial disaster based on a failure of its hedge fund models.
A hedge fund is an investment fund limited to 100 investors. As only those classified as an accredited investor are allowed, the reporting by such funds is exempt from may SEC reporting requirements. While similar in many ways to mutual funds, the aforementioned lack of SEC regulation allows them to pursue much more aggressive strategies.
“If hedge funds were a country, it would be the eighth-biggest on the planet. They can sink whole economies, and have the potential to crash the entire global financial system. Yet they are beyond regulation. We should be very afraid.” – Janet Bush, writing in New Statesman, July 31, 2006
- http://www.newstatesman.com/200607310033 Formerly accessed March 20, 2014