Hedge funds pool investors’ money and invest the money in an effort to make a positive return. Hedge funds typically have more flexible investment strategies than, for example, mutual funds. Many hedge funds seek to profit in all kinds of markets by using leverage (in other words, borrowing to increase investment exposure as well as risk), short-selling and other speculative investment practices that are not often used by mutual funds.
You generally must be an accredited investor, which means having a minimum level of income or assets, to invest in hedge funds. Typical investors include institutional investors, such as pension funds and insurance companies, and wealthy individuals.
How does Hedge Fund work?
- It takes both Long & Short Positions.
- It uses Arbitrage.
- It includes buying and selling of undervalued securities.
- And basically invests in any opportunity that exists in the market.
- Its primary aim is to reduce volatility & risk and to preserve capital.
Hedge Funds Characteristics
- Some of them have the ability to deliver non-market correlated returns.
- Major investors in Hedge funds are: Pension funds, endowments, insurance companies, Private banks and high Net Worth individuals and families.
- Hedge Funds are managed by experienced investment professionals.
- They are illiquid investments.
- They have little to no regulations.
- They are known to use Aggressive Investment Strategies.
Hedge Funds Strategies
Varied range of hedging strategies are available to hedge funds. Some of them are Listed below:
- Long/Short Positions
- Market Neutral Arbitrage
- Merger Arbitrage
- Convertible Arbitrage
- Capital Structure Arbitrage
- Fixed-Income Arbitrage
- Event Driven
- Global Macro
- Short Only
Benefits of Hedge Funds
- Majority of hedge funds have amazing strategies crafted by their brainy Fund Managers. Due to this, funds are able to generate positive returns in both rising and falling equity and bond markets.
- There are wide range of Hedge Funds Strategies available which will help you to meet your investment objective.
- Be sure to reduce the overall portfolio risk if you include hedge funds in your balanced portfolio.
- Years of Statistics and Data has helped in proving that hedge funds have higher returns and lower overall risk than traditional investment funds.
- It is a long-term investment solution.
- It helps in Portfolio diversification.
Based on all of the above, we can conclude that hedge funds are reliable and represent a reasonable way to invest in order to obtain high return.