Hedge Fund
A hedge fund is a privately offered fund that trades liquid markets — equities, credit, currencies, derivatives — with fewer constraints than a mutual fund: it can sell short, use leverage, concentrate, and charge a performance fee. It is not private equity, though the two overlap — crossover funds in late-stage fintech rounds, arbitrage funds in takeovers, credit funds in a fintech's debt.
- Also known as
- Hedge funds, Alternative investment fund, Absolute-return fund
- Used at
- institutional and wealthy investors' portfolios as a diversifier; in M&A as the arbitrage buyers of a target's shares once a bid is announced; in fintech as crossover investors in Series D-and-later rounds and as buyers of listed fintechs after the fall
- Binding
- a fund structure (often offshore) with a prospectus, an investment manager, monthly or quarterly liquidity with notice periods and gates; regulated as an alternative investment fund
- Typical fees
- historically "2 and 20"; since 2015 more like 1.5% and 15–20%, with hurdles and high-water marks; the largest multi-strategy funds pass costs through instead
- Typical scale
- about $4–5 trillion globally; strategies from equity long/short to event-driven (merger arbitrage), credit, macro, quantitative, and multi-strategy platforms
- Parties
- the manager, the investors, the prime brokers that provide leverage and lend shares to short, and the markets — including the companies whose shares they buy and sell
How a hedge fund works in practice
A long/short equity fund holds a payments company it believes undervalued and shorts a competitor it believes overvalued; if it is right about the relative move, it profits whether the sector rises or falls. A merger-arbitrage fund buys a target's shares at €9.80 after a €10.00 bid is announced, earning the 2% spread if the deal closes and losing if it breaks — which is why the arbitrageurs own most of a target's shares by the vote and decide contested bids. A crossover fund, which invests in both public and private markets, takes $50m of a fintech's Series D at a valuation it benchmarks against listed peers, planning to hold through the IPO.
The differences from private equity are liquidity and control. A hedge fund's investors can redeem quarterly, so it holds things it can sell; it takes no board seats and buys no control; it can be short as well as long. The overlap is the crossover fund and the "hybrid" strategies that hold private positions in a liquid fund — a structure that gated redemptions in 2022 when the private marks did not fall with the public ones.
For a fintech, hedge funds appear three times: as the late-stage investors whose public-market discipline reprices the round; as the arbitrage holders who decide a takeover; and as the short sellers whose reports on a listed fintech's accounting have, more than once, been right.
Example
A listed payments company at €40 receives a recommended €50 cash bid. Within a week merger-arbitrage funds hold 35% of the shares, bought at €48–49 — a 2–4% spread for an expected five-month completion, about 6–9% annualised, against the risk that the regulator blocks it. A rival bidder appears at €54; the arbitrageurs, now the largest holders, decline the first bidder's €52 increase and accept €55 from the second. The board's recommendation followed the shareholders it no longer had: the funds that had bought in for the spread were the ones who chose the buyer.
Common mistakes
- Treating a hedge fund as a long-term shareholder; its horizon is the redemption period. - Boards ignoring the arbitrage register after a bid is announced — they are the electorate. - Founders taking crossover money at a valuation it benchmarks to a public peer that then falls. - Liquid funds holding illiquid private positions and gating redemptions when the marks diverge. - Confusing hedge funds with private equity in a fintech's cap table; their rights, horizons and behaviour differ.