A hedge fund can be defined as an offshore investment fund, typically formed as a private limited partnership, that engages in speculation using credit or borrowed capital. Like a mutual fund, a hedge fund is a managed pooled fund that uses different strategies to invest. The fund could invest in stocks, bonds, commodities or real estate. Unlike a mutual fund, hedge fund investors must be accredited. In other words, the investors must have a minimum net worth (the amount depends on each country) of at least a million dollars and have significant knowledge of investments. In the hedge fund world, these investors are known as 'sophisticated investors'.
HOW ARE HEDGE FUND INVESTMENTS DIFFERENT FROM MUTUAL FUNDS?
Hedge fund investments are very similar to mutual funds. Both of them involve a group of people making an investment, managed by someone. What makes them different, is that investors of mutual funds may have their assets sold if the company wants it done. This cannot be done in the case of hedge funds. No investor’s property or return from investment can be affected in such a case. Also, in the case of mutual investments, the investor may not get a fixed sum of money every month or may not receive regular income. While in the case of hedge funds, the investor receives a fixed sum of money on a monthly basis.
ADVANTAGES OF HEDGING:
- Limits losses to a great extent
- Makes it easier for investors to survive fluctuating market periods
- Increases liquidity as investors invest in different types of asset classes
- Offers flexible price mechanism
- Locks in target
- Saves a lot of time as you do not keep a long time track
HEDGE FUND INVESTMENT STRATEGIES:
Hedge funds employ many different strategies. Each investor may adopt their own strategies. Hedge fund strategies can be made on the basis of:
- Style: Global Macro, Directional, Event-Drive, Arbitrage
- Market: Equity, Fixed Income, Commodities, Foreign Exchange
- Instrument: Long/Short Equity, Futures, Options, Swaps
- Exposure: Directional, Market Neutral
- Sector: Healthcare, Industrials, Consumer, Energy, Real Estate, Financials, Tech
- Diversification: Multi-Manager, Multi-Strategy, Multi-Fund, Multi-Market
CONCLUSION:
Although hedge funds involve low risk, it is important for every investor to take the necessary precautions before investing in them. First and foremost, one must have enough capital to make investments and proper knowledge of businesses in which they are interested to invest their funds. Hence it is also known as the “sophisticated investment” and is not commonly available to many people.