By Candice Choi, AP Personal Finance Writer
NEW YORK (AP) — The arrest of a billionaire in an insider trading case last week drew new attention to hedge funds — investment firms that, for many, evoke an exclusive world where the super rich use exotic investing techniques to grow yet richer.
The understanding usually stops there.
In the case against Raj Rajaratnam, federal prosecutors accused the portfolio manager for the Galleon Group of using a powerful Rolodex of contacts to acquire insider information to trade securities. Five other hedge fund managers and corporate executives were charged in the case, and prosecutors suggested the problem could be more widespread.
On Thursday, a lawsuit was filed claiming that Rajaratnam also used his money to help finance Sri Lankan rebels.
Most people who've heard about hedge funds know that a whole lot of money is involved. But what exactly are they, and how do they work? Here are some questions and answers.
Q: First of all, what is a hedge fund?
A: Hedge funds are privately held investment partnerships that are exempt from regulation by the Securities and Exchange Commission because of their limited size and the profile of their investors. So, unlike mutual funds that are generally restricted to trading select securities such as stocks and bonds, hedge funds have the freedom to invest in pretty much any financial instrument on the market.
Hedge funds also aren't required to disclose the details of their assets and liabilities to regulators or investors. Mutual funds such as Vanguard and Fidelity, in contrast, must issue financial reports on a regular basis.
All that may soon change, however. The details are still up in the air, but Congress is now debating legislation to bring hedge funds and other private pools of capital under government supervision.