Glossary · Funds and derivatives
Hedge fund
A hedge fund is a private investment fund for wealthy people and institutions that may bet on prices rising or falling, borrow, and use derivatives, for high fees.
Also called: hedge funds, alternative investment fund, 2 and 20
Net of short sales, Q2 2026: 0.73% of all corporate shares. Mutual funds: $18.6T.
In plain words
A mutual fund is open to anyone and has strict rules on what it may do. A hedge fund is the private version for the rich and for big institutions such as pension funds and university endowments. Fewer rules apply, so the managers can try almost anything to make money.
They can buy what they think will rise, sell short what they think will fall, borrow to make bigger bets (leverage), and trade options, futures and currencies. The name comes from “hedging”: the first hedge fund, started by Alfred Winslow Jones in 1949, bought some stocks and shorted others so that a market fall would hurt less.
The fees are famous: traditionally “2 and 20”, a yearly fee of 2% of all the money plus 20% of the gains. Many funds now charge less, but still far more than an index fund.
Example
What “2 and 20” costs
A $100 million hedge fund earns 10% before fees in a year: $10 million.
- Management fee: 2% of $100 million = $2 million, paid whether the fund gains or loses.
- Performance fee: 20% of the $10 million gain = $2 million.
- Investors keep $6 million: a 6% return, from a 10% gross gain.
- In a year when the fund loses 5%, investors lose 7%: the 2% is still charged.
The managers took 40% of the gain in a good year, and something even in a bad one.
One level deeper
Hedge funds follow many strategies: long/short stocks, global macro (bets on rates, currencies and whole economies), merger arbitrage, quantitative models, distressed debt. What they share is freedom of method and fees linked to performance.
Because they borrow, a few have failed spectacularly. Long-Term Capital Management, run by star traders and two Nobel prize winners, lost most of its capital in 1998, and the New York Fed brought its lenders together to take it over, for fear its collapse would shake the markets.
Do they beat the market? As a group, after fees, mostly not in the long bull market since 2009. Warren Buffett bet in 2007 that an S&P 500 index fund would beat a set of hedge funds over ten years, and won. Some individual managers have had remarkable records.
US stocks held by US hedge funds since 2012
The Fed’s Financial Accounts count hedge funds as a holder of their own only since Q4 2012. Their shares, after subtracting what they have sold short, were worth $906B in Q2 2026: about 0.73% of all corporate shares, far less than mutual funds hold.
The numbers behind the chart
| Date | Value |
|---|---|
| Q4 2012 | $289B |
| Q4 2013 | $404B |
| Q4 2014 | $440B |
| Q4 2015 | $418B |
| Q4 2016 | $435B |
| Q4 2017 | $567B |
| Q4 2018 | $493B |
| Q4 2019 | $591B |
| Q4 2020 | $669B |
| Q4 2021 | $760B |
| Q4 2022 | $572B |
| Q4 2023 | $623B |
| Q4 2024 | $757B |
| Q4 2025 | $856B |
| Q2 2026 | $906B |
Why it matters
Hedge funds manage trillions of dollars for pensions, endowments and the rich, so their bets can move prices, especially when many crowd into the same trade.
Their use of borrowed money means a failure can spread to the banks that lent to them.
Their quarterly 13F reports, which show their US stock holdings, are watched by many investors who want to copy famous managers.
A common mistake
Myth: Hedge funds are hedged, so they are low-risk.
In fact: Despite the name, many take big risks with borrowed money. Some hedge carefully; others bet on one direction. A few have lost almost everything in weeks.
Questions people ask
Who can invest in a hedge fund?
In the US, mainly accredited investors (as of 2026, roughly people with at least $200,000 of income or $1 million of net worth outside their home) and institutions. Many funds also require millions of dollars to get in and lock money up for a year or more.
How do hedge funds make money?
For their investors, by trading gains of every kind. For their managers, through the fees: a yearly fee on the money they run plus a share of the gains.
Can I see what hedge funds own?
Partly. US managers with $100 million or more in listed US stocks (the threshold as of 2026) file a Form 13F with the SEC within 45 days after each quarter ends. It shows their long positions in US stocks, not their shorts or most derivatives. Our investors pages track several of these portfolios.
Read more on BigCapital
About the numbers
- The numbers on this page are recalculated from the data every night; the sources are listed at the end of the page.
- US corporate equities by holder (Z.1): Board of Governors of the Federal Reserve System, Financial Accounts of the United States (Z.1), table F51.1.s Corporate equities and table S1M.e.b.
- Z.1 measures what US-based hedge funds own net of their short sales, from the reports they file with the SEC (Form PF). Before 2012 their holdings sit inside the household sector.
- This page explains a term. It is not investment advice.