PEINVEST
Actively managed vehicles using diverse strategies targeting absolute returns.
Hedge funds are actively managed investment vehicles that employ diverse strategies to generate returns with varying degrees of market exposure. Unlike traditional long-only funds, hedge funds can short-sell, use leverage, trade derivatives, and invest across asset classes and geographies. Major strategy categories include long/short equity, global macro, event-driven (merger arbitrage, activist), quantitative/systematic, credit, and multi-strategy. The industry manages approximately $4.5 trillion in AUM. While criticized for high fees (traditionally "2 and 20"), hedge funds provide portfolio diversification, downside protection during market stress, and access to alpha-generating strategies unavailable in traditional portfolios.
Multi-strategy funds allocate capital dynamically across multiple trading strategies (equity L/S, credit, macro, quant) within a single platform. This provides internal diversification and flexible capital allocation. Leading multi-strat firms include Citadel, Millennium, Point72, and Balyasny. These platforms have attracted significant capital due to more consistent returns.
Traditional hedge fund fees are "2 and 20" — a 2% annual management fee plus 20% performance fee on profits (above a high-water mark). However, fee compression and institutional negotiation have reduced average fees to approximately 1.4% management and 17% performance. Some funds charge higher rates (e.g., top multi-strats charge pass-through expenses).
This depends on the strategy and manager. Top-decile hedge funds consistently outperform on a risk-adjusted basis. However, median hedge fund returns have underperformed simple equity index investing in extended bull markets. Hedge funds add value primarily through downside protection, portfolio diversification, and access to unique return streams.