Remember it is you and not your broker or adviser who will pay the ultimate costs of negligent comprehension and investment planning and forecasting
What precisely is a Hedge Fund?
Fundamentally, the hedge fund is a managed pool of capital for institutions or wealthy individual investors that hires one of various trading strategies in equities, bonds or derivatives, attempting to gain from market inefficiencies and, to some extent hedge underlying risks.
Hedge funds are often lightly regulated and generally are much less transparent than traditional investment funds. That helps them to trade more cautiously. Funds normally have minimum investments periods, and charge fees based both on funds under Management and on performance.
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Many experts argue it is a fault to talk about hedge funds as an asset class: rather the Industry embraces a group of trading strategies. The applicable choice of hedging Strategy for a particular investor depends mostly on its existing portfolio; if for example, it is heavily invested in equities, it might seek a hedging strategy to offset equity risk. Because of this, discussion of relative returns between hedge-funds strategies can be misleading.
Hedge funds use investment techniques that are usually barred for more traditional funds, including short selling: stock – that is borrowing shares to sell them in the hope of buying them back later at a lower price – and using big leverage through borrowing.
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Some of the most common strategies include
Convertible arbitrage:
This involves going long in the convertible securities (that is usually shares or bonds) that are exchangeable for a certain number of another form (usually common shares) at a present price, and at the same time shorting the underlying equities. This strategy previously was very effective and was a standard. However this type of action seems to have lost effectiveness and seems to have lost favour in the crowd.
Emerging markets:
Investing in securities of companies in the ever emerging economies through the purchase of sovereign or corporate debt and /or shares.
Fund of funds:
Invert in a “basket” of hedge funds. Some funds of funds focus on single strategies and other pursue multiple strategies. These funds have an added layer of fees.
Global Macro:
Investing in shifts between global economies, often using derivatives to speculate on interest-rate or currency moves.
Market neutral:
Typically, equal amounts of capital are invested long and short in the market, attempting to neutralize risk by purchasing undervalued securities and taking short positions in overvalued securities.
As you can see the terminology in dealing with “hedge funds” is both ever-changing and confusing.
You should be fluent in both the language and the concepts in order that you can discuss and make intelligent rather than confused choices in your investments.
Remember it is you and not your broker or adviser who will pay the ultimate costs of negligent comprehension and investment planning and forecasting.
Disclaimer
This information is for Learning purposes only. We are indeed not financial mentors. It should not be considered legal or financial advice. You should consult with a financial advisor or other professional to find out what may be the finest for your individual needs and risk tolerance.
Please do your own research.
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