Hedge funds represent a distinctive investment style. Their investment objectives, and their strategies, are very different from more traditional funds. They emphasize absolute return rather than relative return, and they use a very wide range of investment techniques - including leverage, short selling, and other hedging strategies - in the attempt to achieve their objectives.
Hedge funds also represent a distinctive investment culture. Hedge fund management firms tend to be small firms dominated by one or two key investment people. The hedge fund culture is part of the "smaller-is-better" culture. In addition, hedge funds give a new twist to the relationship between the money manager and the client. The client does not merely hire the manager. Instead, the client and the manager become partners, coinvesting in situations that the manager finds attractive.
To introduce the basic themes that separate the world of hedge funds from the world of traditional investment management, we will focus on hedge funds that are structured as limited partnerships and traditional money management strategies that are delivered in the form of a mutual fund. Within the mutual fund universe, there is a world of difference between a money market mutual fund and an equity fund that specializes in small cap Latin American equities. Within the hedge fund universe, there is a world of difference between a market-neutral equity hedge fund that specializes in U.S. utility stocks and a trend-following global asset allocator who takes highly leveraged positions, either long or short, in global financial markets as well as physical commodity markets. But there are nonetheless some basic differences that separate the two worlds.
Finally, hedge funds often use distinctive "delivery systems" to make their strategies available to investors. The hedge fund could take the form of a limited partnership, an offshore fund, a commodity pool, or a specialized kind of separate account. Hedge funds do not typically use the mutual fund structure since this structure does not give the hedge fund manager enough freedom.
