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hedge funds is typically set up by a management team and headed by a hedge fund manager that invest in high risk emerging companies, startups, derivatives, and other risky securities in the hopes of big windfalls. Hedge funds are not regulated by the SEC and by law are restricted to less than 100 investors. Most have a minimum required investment of $500,000 to $1 million. They generally charge a 1-2% management fee and may take as much as 20% of the profits.

Style Box

If all this talk about fund styles has your head spinning, don't get discouraged. There is help on the way, and it comes in the form of a grid known as the style box (devised by Morningstar, the mutual fund rating company). Just about all popular funds (and some unpopular ones) publish their style boxes to describe their investment styles (if not in their prospectus, perhaps in their snapshot profiles).

The style box is not necessarily a strict definition of a fund's investment approach, neither does it always convey a fund's historical style. But it is the fastest way to get an idea about a fund's general investment tendencies and therefore it can also be used as a tool for risk assessment when evaluating a fund. You can usually find the style box in the fund's profile or snapshot document which gives a quick summary of some of the key points of the fund.

There are two types of style boxes. One for stock (equity) funds and the other for bond (fixed-income) funds. Hybrid funds may use both to define their styles. Each box is divided into nine cells, with each cell having definitions on the horizontal and vertical axes. The fund's style is normally defined by marking a certain cell within the style box. …