There are growing demands to unravel the mystery surrounding hedge funds and bring them under tighter regulation in US. The reason: Rather than restricting to the traditional domain, hedge funds are increasingly reaching less sophisticated retail investors.

There has always been an enchanting mystery surrounding the hedge fundsmassive returns, exclusivity, secrecy and light regulationsomething which, rest of the Wall Street can only envy.

There is no legal definition of hedge funds. They are private investment pools of wealthy and financially sophisticated investors. Aiming at absolute returns, they promise profits even in bearish conditions. This stands in sharp contrast to investments like mutual funds, where achievement or failure is measured in terms of relative performance to a stock index, like the Nasdaq or S&P 500. What gives hedge funds an edge over mutual funds is that they are lightly regulated and they can use leverage, derivatives, short-selling and other strategies banned in the mutual fund world. This flexibility allows them to profit regardless of how the broad market is faring. From 1987 through 2002, the Hennessee Hedge Fund Index returned an annualized 15.1% versus 11% for the S&P 500 index.

Majority of hedge funds are incorporated as limited partnerships offshore and do not report to or register with the Securities Exchange Commission (SEC). As hedge funds are private investment partnerships, SEC has granted them more regulatory freedom than mutual funds.

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