A hedge fund is an investment fund that can undertake a wider range

A hedge fund is an investment fund that can undertake a wider range of investment and trading activities than other funds, but is generally only open to certain types of investors specified by regulators. These investors are typically institutions, such as pension funds, university endowments and foundations, or high-net-worth individuals who are considered to have the knowledge or resources to understand the nature of the funds. As a class, hedge funds invest in a diverse range of assets, but they most commonly trade liquid securities on public markets. They also employ a wide variety of investment strategies, and make use of techniques such as short selling and leverage.

Hedge funds are typically open-ended, meaning that investors can invest and withdraw money at regular, specified intervals. The value of an investment in a hedge fund is calculated as a share of the fund’s net asset value, meaning that increases and decreases in the value of the fund’s investment assets (and fund expenses) are directly reflected in the amount an investor can later withdraw.

Most hedge fund investment strategies aim to achieve a positive return on investment whether markets are rising or falling. Hedge fund managers typically invest their own money in the fund they manage, which serves to align their interests with those of investors in the fund. A hedge fund typically pays its investment manager a management fee that is a percentage of the assets of the fund, and a performance fee if the fund’s net asset value increases during the year. Some hedge funds have a net asset value of several billion dollars. As of 2009, hedge funds represented 1.1% of the total funds and assets held by financial institutions. As of April 2012, the estimated size of the global hedge fund industry was US$2.13 trillion.

Because hedge funds are not sold to the public or retail investors, the funds and their managers have historically not been subject to the same restrictions that govern other funds and investment fund managers with regard to how the fund may be structured and how strategies and techniques are employed. Regulations passed in the United States and Europe after the 2008 credit crisis are intended to increase government oversight of hedge funds and eliminate certain regulatory gaps.

1. According to the passage, the relationship between Bank of America and a hedge fund is most like:

a. an iPad and a plasma television
b. Prospect Park and a private Long Island country club
c. a Mack truck and a motorcycle
d. a state hospital and a chiropractor’s clinic
e. Domino’s Pizza and a local pizzeria

2. According to the information in the passage, which of the following is NOT true of hedge funds?

a. Withdrawal from hedge funds can be made based on the value of the fund at the time.
b. The people who manage hedge funds typically invest their own money, helping to form solidarity with the original investors’ interests.
c. High-net-worth individuals can invest in hedge funds.
d. Hedge funds typically maintain a positive return, unless the market is doing considerably poorly.
e. The 2008 credit crisis affected the strategies previously employed by hedge fund specialists.

3. Based on the information in the passage, “liquid securities” (Highlighted) most likely refers to:

a. difficult to access funds, swimming in a sea of paperwork before they can be accessed
b. stock in alcoholic beverages
c. funds that are easy to trade and don’t change value while changing hands
d. savings bonds
e. the stock market’s private cache

4. This passage would best be described as:

a. didactic
b. sententious
c. indignant
d. irreverent
e. detached

5. Based on the information provided in the last paragraph, which of the following can be reasonably inferred regarding hedge funds?

a. Hedge funds relentlessly manipulate money to their advantage even when an economic crisis ensues.
b. If hedge funds were made available to the general public, they wouldn’t be as lucrative based on inexperience.
c. While hedge funds may represent trillions of dollars, other institutions have a far greater percentage of the world’s capital.
d. Prior to the credit crisis of 2008, hedge funds were likely to be circumventing regulatory conditions that most others are subject to.
e. A hedge fund is an unscrupulous means of creating money among the wealthiest citizens.