Hedge Funds Defined – What is a hedge fund?

The only hedges I want to see now are my own hedges being trimmed by a Mexican gardener. He’s a friend of mine, an honest nice guy, and Picasso with a weedeater. (I tried hiring a Japanese gardner but he subcontracted the actual labor to a group of Vietnamese workers.) But hedge funds for my investments? No way Jose. Bear Stearns had to admit that subprime issues had led to the meltdown of 2 of its hedge funds.

The free encyclopedia defines a hedge fund this way: “An investment company that uses high-risk techniques, such as borrowing money and selling short, in an effort to make extraordinary capital gains.” To keep my links legal you can click here to see other definitions.

Some definitions call a hedge fund a fund, while others refer to the hedge fund as an investment vehicle. The word, when used as a noun (remember the old “person, place, or thing” technique) refers to a hedge fund as an actual company. For instance: “hedge fund – a flexible investment company for a small number of large investors (usually the minimum investment is $1 million); can use high-risk techniques (not allowed for mutual funds) such as short-selling and heavy leveraging”

Without a doubt hedge funds are best left to the wealthy and to big investment houses. That lets me out. After all, if I’m sitting here watching a guy trim a hedge with a weedeater. I have no business playing that game. But putting humor aside for a minute it is safe to say Bear Sterns knew the risks, but they may not have known the volatility of the bonds they were leveraging. That’s why it is so important to have truthful SEC filings and truthful statements about what is packed into bonds. A bond rating depends on facts, not speculation.