What is a Hedge Fund? A Super Simple Explanation for Kids

What is a Hedge Fund? Funds 101: Easy Peasy Finance for Kids and Beginners

Introduction to Hedge Funds for Kids and Teens

This video explains the concept of a hedge fund in a simple, concise way for kids and beginners. It could be used by kids & teens to learn about hedge fund investing, or used as a money & personal finance resource by parents and teachers as part of a Financial Literacy course or K-12 curriculum.

What is a Hedge Fund - A Simple Explanation for Kids Teens and Beginners
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Suitable for students from grade levels:

  • Kindergarten
  • Elementary School
  • Middle School
  • High School

The topics covered are:

What is a hedge fund?

Hedge Fund for Kids Teens and Beginners
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A hedge fund is a type of actively managed fund that focuses on high risk high return investments. Hedge funds invest very aggressively using leverage and shorting to try and increase their returns.

Hedge funds can make such risky investments because they are subject to far fewer regulations than Mutual Funds or Exchange Traded Funds / ETFs.

Why are they called hedge funds?

When hedge funds were first created, they focused on hedging or minimizing their risk, and that’s how they got their name. Nowadays, their focus is more on trying to increase returns than to decrease risk.

Even though their focus shifted, the name hedge fund stuck.

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Who uses / invests in a hedge fund company?

Hedge funds often have high minimum investments, and therefore they are usually used by institutions, sophisticated investors, or people with a very high net worth – individual investors like you and me won’t even qualify.

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Hedge funds are able to take huge risks since their clients have a lot of money, and would be able to absorb any possible losses that risky investing entails.

What do hedge funds invest in? What are hedge fund strategies?

Because hedge funds are regulated much less than regular Mutual Funds, they can invest in practically anything, including coins, art, stamps, or even patents!

Hedge funds can also short stocks or other securities.

Is hedge fund strategy successful? Do hedge fund companies always beat the market?

Market Beating Returns - Hedge Funds for Kids Teens and Beginners
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Since hedge funds use risky investment strategies, do they make above average returns?

The goal of a hedge fund is to use these strategies to make high returns, but that doesn’t always happen. Like with any other investment, high risk can lead to high returns, but also high losses.

And the high fee they charge also eats into potential gains.

Because of all this, hedge funds don’t always provide above average returns.

How much fee do hedge funds charge?

Most hedge funds use something called the ‘2 and 20 rule’, where the fee is 2% of the money invested and 20% of the profits earned above a certain amount.

Investing in a Hedge Fund
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Can hedge fund investors take money out of the fund any time they like?


Most of the time, hedge funds require their investors to ‘lock up’ money for a certain time before they can take it out.

This period is very long – usually a few years.

Download Transcript: Ideal for Use by Teachers in their Lesson Plan to Teach Kids & Teens

Podcast: What is a Hedge Fund

What is a Hedge Fund
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