Jurisdiction(s):
United Kingdom

Key definition

Hedge fund definition

What does Hedge fund mean? In legal practice, a hedge fund is an alternative investment fund seeking absolute returns through strategies such as short selling, leverage (gearing), arbitrage and extensive use of derivatives (options, futures, swaps and forwards), including algorithmic/programme trading. The term is not defined in statute and is used descriptively; in the UK and Ireland such vehicles are generally treated as alternative investment funds (AIFs) under the UK AIFM regime and the EU AIFMD (as implemented in Ireland), rather than UCITS. Hedge funds are typically open‑ended and marketed to professional and sophisticated investors. The AIFM (authorised by the FCA or the...

Hedge funds: open-ended structures, short positions, leverage, performance fees and the UK tax context

Published by a LexisNexis Tax expert

Practice notes

There is no single, settled definition of the term ‘Hedge fund’. Instead, the label functions as a broad catch-all for Funds that do not fit neatly within other collective Investment categories (eg authorised investment funds or private equity vehicles). Nevertheless, a set of traits is commonly and typically seen among so‑called hedge funds. Where these arise, they would usually, in practice, lead to a fund being treated as a ‘hedge fund’ rather than some other kind of investment fund. In practice, most hedge funds exhibit all, or at least nearly all, of the following characteristics:

an open‑ended pooled investment structure
a focus on delivering total return to investors
a generally opportunistic approach
the use of ‘short’ positions
extensive leverage (ie borrowing)
fee models comprising a fixed management charge and a variable annual performance charge

This Practice Note examines each of these characteristics in turn. The UK tax regime applicable to hedge funds is considered in the following Practice Notes:

Tax and hedge funds—structuring the hedge fund vehicle
Tax and hedge funds—trading in the UK and the investment manager exemption (IME)
Tax and hedge funds—management structure

It should be noted that this Practice Note and the other Practice Notes mentioned above...

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Web page updated on 21/05/2026

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