In the United States, the Securities and Exchange Commission (SEC) has stated that the term
hedge funds “has no precise legal or universally accepted definition.”1 But most market participants
agree that hedge funds have the following characteristics: (1) almost complete flexibility
in relation to investments, including both long and short positions; (2) ability to borrow money
(and further increase leverage through derivatives) in an effort to enhance returns; (3) minimal
regulation; (4) some illiquidity since an investor’s ability to get an investment back is restricted
through lock-up agreements (that may prevent any liquidity during the first 1 or 2 years of a
hedge fund’s life) and quarterly disbursement limitations thereafter (subject to gates, which may
further limit disbursements); (5) investors include only wealthy individuals and institutions such
as university endowments, pension funds, and other qualified institutional buyers (except through
fund of fund investments, which are available to a broader array of investors); and (6) fees that
reward fund managers for performance. | 
