By: Michael E. Martinez

Hedge funds are generally for wealthy investors, normally the minimum contributions for these funds are $1 million. The managers of the hedge funds usually sell stocks short and trade options. As where regular money managers get a percentage of assets, hedge fund managers get the percentage of assets in addition to 20 percent of unrealized and realized gains. The term heddge comes from selling short some stocks while buying others, so some of the risk in the markets has been hedged.

Incentive fees are normally implied on these hedge funds, they are the fee on any new profits earned by the fund for the period. Most hedge funds are not alike however, they all use different investment strategies, some of these are arbitrage, event driven or directional. Arbitrage uses differences in the prices of closely related stocks to invest. Event driven funds try to seek profits such as mergers or bankruptsy. The directional strategy uses market flows to make choices on investment decisions such as interest rates or bond yields.

Hedge funds provide investors with whats called an investment memo which discuss the objectives of the fund, structures and as well as a bio of the management team. Like a mutual fund or any other investment, be sure you know what the fund's goals are before investing and always read the prospectus reports as well as consulting your advisor or broker. Hedge funds can be set up as a limited liability corporation or limited partnerships.

Hedge funds have become controversial due to the large amounts of money that they manage. Some may argue that hedge funds play a large part of the economy as they make up a large piece of the stock market. There are roughly 8,000 or so hedge funds making up over $1 trillion.