Hedge funds usually refer to private investment vehicles that seek above-average returns through active portfolio management. The first ever hedge fund, founded by Alfred Winslow Jones, was introduced in New York on 1 January 1949 to sell short some stocks while buying others, thereby hedging some market risk. Generally, a hedge fund is a comparatively less regulated private investment fund and restricted by law to no more than 100 investors with a minimum contribution of $1million.

Hedge fund is a private pool of investment capital organized into a limited partnership to invest in a portfolio with a variety of securities. Hedge funds are subject to the terms of an investment agreement entered into by the sponsor of and investors in the hedge fund. In a bear market, talk of using hedge funds tends to increase. Although hedge funds are not mutual funds, people often mistake them as such. The word "hedge" implies defensive management or insurance against bad times.

A hedge fund is a fund that can take both long and short positions, use arbitrage, buy and sell undervalued securities, trade options or bonds and invest in almost every opportunity anywhere in the market its managers foresee impressive gains at reduced risk. Hedge funds are similar to private equity funds, such as venture capital funds, in many respects. Most hedge funds invest in very liquid assets, and permit investors to enter or leave the fund easily.

The function of hedge funds in the context of our capital market in Bangladesh is insignificant and its use is not popular. Popularity at this stage of our market condition is also not expected. What we require in the first place is the tools and vehicles-such as options and derivatives-without which investors can never taste the sweetest fruits from investing in hedge funds. Presently, some activities of hedge funds are apparent in our market though these are almost restrained within few financial institutions only. But application of different hedging strategies of hedge funds towards our market shall not only attract mass investors (institutional and retail) but also bring in desired depth and ensure potential growth of our market in the near future.

Hedge funds tend to be skill-based investment strategies that attempt to obtain returns based on the unique skill or strategy of the trader. These returns are considered absolute, as they do not depend on the relative long-term return of underlying traditional stock and bond markets. The primary aim of most hedge funds is to reduce volatility and risk while attempting to preserve capital and deliver positive returns under all market conditions.

For a variety of reasons investors are attracted to hedge funds. Hedge funds have the potential to deliver positive returns under all market conditions, low correlation to traditional asset classes and access to highly specialized strategies not typically available through traditional money management.

Hedge funds are offered as private investment partnerships. This offer is generally availed by fewer than hundred affluent investors or institutional clients and all hedge funds are not appropriate for all prospective investors. Most hedge funds are available only to persons who meet some specific financial requirements. By law, the manager of the hedge fund has to determine the investor's risk tolerance, investment goals, and investment experience, before inviting the investor to contribute to the fund.

Friends, family, colleagues, relations and many others can be the potential pools of capital for hedge fund. This is the most promising source of capital and may be the only sure way of raising money. But such network does not guarantee that one can build a real critical mass of funds. High net worth and retail can be the potential pools of capital for hedge fund. That market is extremely difficult to reach without a big marketing budget or relationship with a private bank or broker dealer, which might put a fund of funds on a recommendation list. Even these relationships may not deliver unless the broker dealer, for example, has a real incentive to sell the fund. Institutional investors are other potential pools of capital for hedge fund. Many start out with ambitious plans to tap into their institutional rolodex. It is likely to prove a frustrating experience because pension funds and insurance companies take months, if not years, to make a hedge fund allocation and normally eventually opt for a fund of funds that has an institutional look and feel.

Until recently, wealthy families felt that they could manage their hedge fund investments on their own. But now they realize that the universe of hedge funds is now so large that they can't do it on their own. Some families are turning to fund of funds to manage specialist elements of their hedge fund allocations. However, none of these pools of capital is easy to access, not even to the friends, family and colleagues. All these sources will often talk a great game and promise to invest in the fund but somehow the money never arrives. The only solution is to sharpen the marketing edge and, if the goal is to target the institutions, to look at creative approaches.

Hedge funds are like mutual funds in two respects-they are pooled investment vehicles (i.e. several investors entrust their money to a manager) and they invest in publicly traded securities. But there are important differences.

Mutual funds are public investment vehicles. A public pool of investment capital is organized to invest in a portfolio composed of often a predetermined type of securities available to the general public. It is registered under the SEC while hedge funds are private investment vehicles. Investors in mutual funds are not limited and can purchase many funds. Usually small minimum investments are required ....