Hedge Funds 101

How They Work and Who They Impact

Hedge funds are a proven type of alternative investment that pools capital from various qualified investors to purchase a diverse portfolio of assets.

Institutional investors invest in them to help diversify their portfolio, manage risk, and deliver reliable returns over time. More than two-thirds of all assets managed by hedge funds, more than $1.5 billion, come from public pensions, university endowments, and nonprofit foundations.

How Does a Hedge Fund Work?

Investors turn to hedge funds, private credit, crossover funds, and other alternative asset managers, because, unlike other pooled funds, they protect investors from market volatility and downturns by providing reliable, uncorrelated returns regardless of market conditions.

They achieve this by actively managing their investments using sophisticated financial tools like short selling and research-based investment strategies.

Who Do Hedge Funds Benefit?

Pensions invest nearly $872 billion in hedge funds to ensure financial stability and peace of mind for retirees and their families long after their careers have ended. More than 26 million workers — including teachers, firefighters, and police officers across the country — rely on the reliable returns of alternative asset managers to help grow their pensions for retirement.

Prominent nonprofit organizations nationwide invest approximately $486 billion in hedge funds to support their mission-critical research and development projects. Nonprofits and charitable organizations can make meaningful differences in local communities because of the reliable returns generated by investments with alternative asset managers.

Colleges and universities throughout the country invest approximately $157 billion in hedge funds to ensure they can support future generations of students. These institutions depend on the reliable returns of alternative asset managers to support students on scholarships, help with operating expenses, and fund educational opportunities—often making college possible for underprivileged students.

Alternative asset managers provide $716 billion in private credit to American businesses of all sizes, supporting job creation, research and development, and economic growth in all fifty states. The injection of private capital helps business owners and entrepreneurs hire talent, invest in costly projects, purchase equipment, build facilities, and innovate. 

The private credit provided by alternative asset managers also serves as a stabilizing force, especially during economic uncertainty, like COVID-19, when sources of private capital are scarce.

Related Resouces

Leading Data Provider: Portfolios with Hedge Funds Do Better
Barclays Hedge Fund Analysis Finds that Pass-Through Expense Funds Outperform
Impact of Hedge Fund Allocation on Endowment Returns