More than half a million people who benefit from the public pension system in New Jersey will be affected by the state's decision in May to halve its investment in hedge funds. The decision came after labor unions pressured the New Jersey State Investment Council to reduce the amount of money that goes to hedge fund managers in management fees.
This is just one example of how hedge funds affect the lives of millions of Americans, even if the average American isn't wealthy enough to invest in one directly. If you have a pension, received an academic scholarship from your university's endowment or are a member of a church, there's a chance hedge funds impact your life.
Over the last 15 years or so, large entities have joined high net worth individuals in investing in these private funds because of their promise of high returns. Hedge funds are known to use aggressive investment strategies to produce returns, irrespective of the direction of the market. In 2015, a survey found that at least 283 U.S. public pension funds were invested in hedge funds.
Critics argue that such entities are not equipped to deal with the losses that are possible with risky investing that is available to hedge funds. Others say that because hedge funds are not highly regulated, they engage in unethical practices or invest in assets that are harmful to the environment or society.
So what exactly is a hedge fund, and what are the risks?