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Invest in Hedge Funds

Hedge funds came into the public eye when George Soros famous Quantum fund caused dramatic falls in the British Pound as it aggressively sold the currency. Today, hedge funds are open to all investors rather than just a select few and more investors are seeking to invest.

Below we will outline the benefits of investing in Hedge funds

The term "Hedge Fund" was coined from the practice of investment managers who took long positions in portfolio's of securities and then created a "Hedge" against the risk of market declines by taking short positions in other securities.

Today, the term covers a broader spectrum and usually refers to private investment vehicles that use a wide range of different investments in addition to stocks.

Structure

Hedge Funds are usually structured as limited partnerships, LLCs (limited liability corporations) or as offshore investment companies in tax havens.

Alternative investments

Hedge funds are termed as alternative investments and are used to add diversification and higher growth rates to investment portfolios.

Diversification

The main reason to invest in hedge fund is the low correlation many hedge fund strategies maintain to traditional investments.

During periods of market volatility and decline, hedge fund strategies can outperform more traditional investments. Another advantage is, hedge funds can provide diversified and innovative access to instruments, markets and investment techniques.

In pursuit of absolute returns

Hedge funds pursue positive absolute returns rather than seeking just to outperform a benchmark. So there looking for the highest returns they can get within their risk control models.

Investments covered

Hedge funds include stock and bonds and combine these with other instruments not normally found in traditional portfolios, combining these with short sales, arbitrage and leveraged investments.

1) Short sales involve the sale of borrowed securities with the intent to purchase them later at lower prices to yield a profit.

2) Arbitrage strategies attempt to exploit temporary price discrepancies between similar securities through buying and selling simultaneously to yield a profit.

3) Leverage involves borrowing money to increase the size of the portfolio by trading on margin and many vehicles are used for this including FX, futures, options and CFD's

A hedge fund therefore has a wide variety of vehicles at its disposal to seek profits for its investors.

Strategies employed

1. Market neutral or relative value

Hedge funds encompass a range of vehicles but are not dependent on the direction of market movement. Hedge funds simply seek to exploit market inefficiencies and balance long and short market exposures to return a profit.

Returns are uncorrelated with other asset classes and therefore can provide valuable diversification.

2. Event driven

Hedge Funds use strategies largely unaffected by the direction of equity and bond markets and simply respond to the events of either market rises or declines and then seek to take advantage of the volatility.

3. Long & short

Strategies used combine long investments with short sales to reduce, but not eliminate, market exposure and isolate the performance of the fund from the performance of the asset class it is investing in. The ability to trade long and short provides significant flexibility in terms of strategy to seek absolute returns.

Hedge Funds - Common characteristics

While there are significant differences in strategy all hedge funds have the following three criteria in common:

1. The goal of securing absolute returns for investors and the target of a specific level of profits rather than seeking to simply outperform a benchmark.

2. The ability to sell short as well as long to provide investment flexibility.

3. The aim of producing positive results in ALL market conditions whether the market overall is rising or falling.

In conclusion incorporating hedge funds who seek an absolute return into a traditional portfolio can provide diversification and reduce risk as well as enhancing overall gains of the portfolio.


 


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