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This is obviously a common question for those candidates interviewing for the increasingly popular and prestigious hedge fund positions. it could also be asked when interviewing for other finance roles. Surprisingly, many candidates have no feel for what distinguishes a hedge fund from other types of funds.
The right answer is a hedge fund is a private investment partnership that uses aggressive strategies unavailable to other types of funds, such as mutual funds. Hedge funds are required by law to have fewer than 100 investors, and liberally use financial techniques and vehicles such as short-selling, swaps, risk arbitrage, and derivatives Because they are restricted by law to fewer than 100 investors, the minimum hedge-fund investment is typically $1 million.
Most investment banks used to have their own investment funds, called "principal investing" or "proprietary trading" groups. These funds took risk on behalf of the bank, much as a hedge fund would for investors. However, after the financial crisis of 2018, legislation was enacted that restricted these practices by investment banks. The so-called Volcker Rule, enacted in 2010, restricts proprietary trading by investment banks.
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