Understanding How A Hedge Fund Works
When investments are mentioned, it is usually stocks, bonds, the money market and unit trusts that are talked about. The sophisticated investor however has something else in their portfolio and that is a hedge fund. One reason they are not very well known or commonly heard is that they require quite a large outlay for the initial investment. Also, the funds have to remain intact for at least a year. Most often, the funds are set up by partners who team up to form a private investment partnership.
The funds are managed very aggressively. The investment tactics are highly sophisticated and they include venturing into international markets with a view to maximizing returns. They also differ from investments like mutual funds in that they are not regulated. They are however some laws governing them.
In the US for instance, most of the partners in an investment partnership have to be certified. They are required to earn a minimum amount of money, have a net worth of at least one million US dollars and have some knowledge or experience in investment matters.
Hedge funds are done as a way of reducing risk while making maximum returns. The fund is so called because when it was first started, the aim was to create a hedge or barricade from the risks in a bear market. This was done by try to short the market which is an option that is not available for mutual funds. Today, many tactics are used so the fund is not just about creating a fence against risks. A lot of speculative investments are made, some of which are more risky than other markets.
Today, the funds take be both short and long term and they may use the services of arbitragers. They may trade in underrated securities, bonds or trade options and most other opportunities where good returns are anticipated and at low risk. While the strategy differs a lot, a lot of investments are made against market downturns. A common goal of is to realize returns no matter what the conditions.
There are at least 14 strategies that are used to make investment decisions. They all have varying ranges of risks and returns. For instance, there is a macro hedge fund. It seeks to profit from major changes in interest rates worldwide and trade policies of different countries. It poses higher risks but good potential for high returns.
There is also an equity hedge fund. This one seeks to realize gains from slumps in the equity market by shorting stocks or stock indexes that are overvalued. The market may be in a particular country or in the global market.
Hedge funds strategies differ because the funds are invested based on different factors. Tactics vary in the factors of risk, returns and volatility. For a fund to be successful in realizing the ideal of maximum returns with minimum risk, these factors must be understood and harmonized so that funds are placed where returns will be realized no matter what the market conditions.
The funds are managed very aggressively. The investment tactics are highly sophisticated and they include venturing into international markets with a view to maximizing returns. They also differ from investments like mutual funds in that they are not regulated. They are however some laws governing them.
In the US for instance, most of the partners in an investment partnership have to be certified. They are required to earn a minimum amount of money, have a net worth of at least one million US dollars and have some knowledge or experience in investment matters.
Hedge funds are done as a way of reducing risk while making maximum returns. The fund is so called because when it was first started, the aim was to create a hedge or barricade from the risks in a bear market. This was done by try to short the market which is an option that is not available for mutual funds. Today, many tactics are used so the fund is not just about creating a fence against risks. A lot of speculative investments are made, some of which are more risky than other markets.
Today, the funds take be both short and long term and they may use the services of arbitragers. They may trade in underrated securities, bonds or trade options and most other opportunities where good returns are anticipated and at low risk. While the strategy differs a lot, a lot of investments are made against market downturns. A common goal of is to realize returns no matter what the conditions.
There are at least 14 strategies that are used to make investment decisions. They all have varying ranges of risks and returns. For instance, there is a macro hedge fund. It seeks to profit from major changes in interest rates worldwide and trade policies of different countries. It poses higher risks but good potential for high returns.
There is also an equity hedge fund. This one seeks to realize gains from slumps in the equity market by shorting stocks or stock indexes that are overvalued. The market may be in a particular country or in the global market.
Hedge funds strategies differ because the funds are invested based on different factors. Tactics vary in the factors of risk, returns and volatility. For a fund to be successful in realizing the ideal of maximum returns with minimum risk, these factors must be understood and harmonized so that funds are placed where returns will be realized no matter what the market conditions.
Source...