So what is a hedge fund?

I was reading an article on Bloomberg about how high net worth Asian families are deserting hedge funds en mass. Firstly, I had to do a little research to understand the difference between hedge funds and mutual funds as I wasn't entirely sure.

So I discovered mutual funds differed to hedge fund insofar as hedge funds are pooled investments generally investing in security classes such as shares, bonds, infrastructure, short-term cash, fixed interest, derivatives and some venture capitalism using the equity provided by members.

The fund keeps a percentage of the fund in cash, usually in the 6% to 10% range so as to meet any short-term outflows. Hedge funds also use pooled funds from members employing higher risk strategies for greater returns targeting sophisticated investors who are generally multi-millionaires or billionaires.

The fund requires accredited investors, in Australia they must meet certain requirements in terms of income, net assets and require a current certificate from a certified accountant under Chapter 6D or Chapter 7 if wholesale clients.

In order to qualify for a sophisticated investor status, the individual must have an income exceeding $250,000 for the previous two years or hold $2.5 million in assets. Hedge funds tend to invest in venture capitalism, also derivatives including short-selling strategies, employ debt strategies involving leverage and carry much higher risk.