Hedge Fund

Similar concept as a mutual fund, but usually aimed for wealthy individuals (minimum contribution to get in sometime $500,000+, usually more) and they usually are very flexible and nimble with their strategies, whereas a mutual is held to they way it invests (as Sachin touched upon.)

The result is that they offer higher reward with, of course, higher risk. There are many different types. Quantitative models, discretionary, and some that deal with private placements.

Most (although not all) are smaller than mutual funds with the amout of assets they manage so they can get in and out of positions quicker and move the $$$ around to different areas of teh markets where they see opportunity, where is a large mutual fund cant get in and out of positions without adversly affecting the market. It simply takes longer. That is why you see some funds close themselves off to new investors.

For an anology, think of a mutual fund being a large cruise liner trying to change direction, vs. a hedge fund being a speedboat changing its course on a dime. Their size and regulatory loopholes allow them to maneuver the markets at a much quicker pace.

 

Speaking oif hedge funds. Here is an old article I dug up that kind of delves into one of the largest and successfull hedge funds on the street SAC (named after the founders initials.) They are based out of CT and only hire the best and brightest, and they are very successfull.

This will give you a little insight into their particular style.

Back when I worked on the Deutsche Bank NASDAQ floor, we used to handle a few of their orders. But you would never try to trade against them b/c you would get killed 90% of the time. So basically we would just try to get out of any position we had ASAP and take a small loss. Basically accomodating them hoping for better orders in the future.

http://businessweek.com/magazine/content/03_29/b3842001_mz001.htm

 

Absolutely. Its basically exploiting and advantage that the retail investors doesnt have access to. I have no idea why it hasnt been addressed (political/lobbying I am sure,) but I see them cracking down on this in the near future.

The SEC has constantly gone after segments in the financial world historically, and cracked down (sometimes years after the exploitation takes place.)

But I see this coming next.

 

Yeah, but front running is when you have a CUSTOMERS ORDER in hand, and you trade ahead to benefit yourself by using the orders pressure to move the market.

example: you have a large buyer of a relatively liquid stock and you go buy 5000 shares and THEN start working on the customers order to buy 500,000 shares, knowing that buying more will bid up the price to your advantage. and then you dump it. Legally once you get that order you must service the client first. Now if you suspect he will call you, that is fair game to try to "buy ahead."

What the hedge funds do is simply pay to get what the biggest calls on the street will be. THen trade accordingly. Not much different, and that ethical, I agree, but really not front running.