A hedge fund in the United States is a private PARTNERSHIP that engages in a variety of high-risk INVESTMENT strategies for PROFIT. Investors should not think that a hedge fund provides them with protection against risk; in fact the opposite is true. Hedge funds operate under different rules from most MUTUAL FUNDS and engage in such activities as ARBITRAGE, investments in EMERGING MARKETs, SHORT SELLING, PROGRAM TRADING, swaps, and other financial investments. Because they are private-investment partnerships, hedge funds in the United States are typically limited to 99 investors and a general partner. The general partner is paid a small management fee, usually 1 percent of ASSETS under MANAGEMENT, and given a significant share of the profits earned by the hedge fund, often 20 percent or more. Hedge funds are exempt from the Investment Company Act of 1940, meaning they not subject to the standard reporting requirements of CORPORATIONs or mutual funds. Taxation of hedge funds’ profits is constantly changing. At least 65 percent of the investors must be “accredited,” meaning that each investor should have a net worth of at least $1 million and an INCOME of at least $200,000 in the previous year. Most hedge funds require a minimum investment of $25,000 or more and have lock-up periods (times during which investors cannot get their money back) of one year or more. The most famous hedge fund in the United States, Long Term Capital Management (LTCM), had a minimum investment of $5 million and a lock-up of two years. As previously noted, hedge funds engage in high-RISK investment strategies, hoping to earn significant profits. One strategy, arbitrage, is the practice of buying a product at a low price in one market and selling it at a higher price in another market. Arbitrage is as old as trade. A basic business maxim is “buy low and sell high.” Knowledgeable middlemen, knowing the prices of products in different parts of the world, would buy from producers in one region and sell to consumers or merchants in another region. One motivation for the exploration of the New World was the control of land-based trade by merchants in the Middle East. European businesspeople and monarchs knew that new DISTRIBUTION CHANNELs would reduce arbitrageurs’ power. Hedge-fund managers are, typically, knowledgeable international traders who take advantage of price differentials, earning small profit margins on large sums of money. One of the most famous hedge-fund operators is George Soros, a Hungarian-born manager who made billions of dollars in currency and interest-rate markets in the United States. A second hedge-fund strategy is investment in emerging markets. Often markets like Central European countries and Russia after the collapse of the Soviet Union offer tremendous profit opportunities for high-risk investors. Most small, individual investors do not have the time or knowledge to make investments in emerging markets. Hedge funds also engage in short selling, the sale of borrowed securities, betting that the price of those shares will decline. If the share price does decline, the hedge fund repurchases the shares at the lower price, earning a profit on the difference. Because they control significant sums of MONEY and additional borrowed funds based on their CAPITAL, hedge-fund managers can influence market prices through their buying and selling. Hedge funds often engage in program trading, the purchase and sale of large volumes of shares or other securities at preset prices. Computers are used to purchase and sell shares automatically, moving the hedge fund into and out of markets rapidly. Program trading was implicated in the massive 1987 sell-off of stock, when the Dow Jones Industrial Average declined over 500 points in one day. Swaps are the exchange of securities with the agreement to repurchase them at some future time. Hedge funds engage in interest-rate and currency swaps, hoping to profit on changing market conditions. LTCM’s demise came when the hedge fund bet that the spread between short-term and long-term INTEREST RATES would narrow. Instead the spread increased, and because the fund was highly leveraged, it lost billions of dollars. Hedge funds control billions of dollars worth of assets and have significant influence on financial markets. They tend to profit during downturns in the economy and financial crises. Because they are exempt from SECURITIES EXCHANGE COMMISSION reporting requirements, there is relatively little information available about them.