Hedge Funds

Imran Baloch

 Legally. Investments in hedge funds are illiquid as they often require . long. hedge funds are most often set up as private investment partnerships that are open to a limited number of investors and require a very large initial minimum investment.Definition  An aggressively managed portfolio of investments that uses advanced investment strategies such as leveraged. short and derivative positions in both domestic and international markets with the goal of generating high returns (either in an absolute sense or over a specified market benchmark).

. but differ in that the fund has far more .  You can think of hedge funds as mutual funds for the super rich.S. along with a significant amount of investment knowledge. They are similar to mutual funds in that investments are pooled and professionally managed.Explanation  For the most part. laws require that the majority of investors in the fund be accredited. That is. they must earn a minimum amount of money annually and have a net worth of more than $1 million. In the U. hedge funds (unlike mutual funds) are unregulated because they cater to sophisticated investors.

so it isn't accurate to say that hedge funds just "hedge risk". . but the goal of most hedge funds is to maximize return on investment. In fact. because hedge fund managers make speculative investments.Explanation Cont…  It is important to note that hedging is actually the practice of attempting to reduce risk. hedge funds use dozens of different strategies. The name is mostly historical. as the first hedge funds tried to hedge against the downside risk of a bear market by shorting the market (mutual funds generally can't enter into short positions as one of their primary goals).  Nowadays.

particularly relative value strategies.unlike conventional equity or mutual funds (unit trusts). which are generally 100% exposed to market risk. and understand the consequences of. major stock market corrections. including many Swiss and other private banks. is not dependent on the direction of the bond or equity markets -. relying on the specific expertise of the manager or management team.FACTs About HF  Estimated to be a $1 trillion industry and growing at about 20% per year with approximately 8350 active hedge funds. Most hedge funds are highly specialized. disciplined and diligent. Hedge fund managers are generally highly professional. that have lived through. some of which use leverage and derivatives while others are more conservative and employ little or no leverage.        An increasing number of endowments and pension funds allocate assets to hedge . Includes a variety of investment strategies. Their returns over a sustained period of time have outperformed standard equity and bond indexes with less volatility and less risk of loss than equities. Investing in hedge funds tends to be favored by more sophisticated investors. Performance of many hedge fund strategies.

etc.). hedge fund strategies tend to hedge against downturns in the markets being traded. calls. Many hedge funds are flexible in their investment options (can use short selling. futures. private banks and high net worth individuals and families invest in hedge funds to minimize overall portfolio volatility and enhance returns. insurance companies. leverage. options. Hedge funds vary enormously in terms of investment returns. but not all.Characteristics of HF  Hedge funds utilize a variety of financial instruments to reduce risk. volatility and risk. enhance returns and minimize the correlation with equity and bond markets. Most hedge fund managers are highly specialized and trade only within their area of expertise and competitive advantage. derivatives such as puts. endowments. Pension funds. Many.    Hedge funds benefit by heavily weighting hedge fund managers’ remuneration .   Many hedge funds have as an objective consistency of returns and capital preservation rather than magnitude of returns.

index or other investment. can be long convertible bonds and short the underlying issuers equity.  investing in anticipation of a specific event . exiting of bankruptcy proceedings.  selling short .Hedge Fund Strategies A wide range of hedging strategies are available to hedge funds.  trading options or derivatives .seeking to exploit pricing inefficiencies between related securities .selling shares without owning them.contracts whose values are based on the performance of any underlying financial asset. .for example. hostile takeover. hoping to buy them back at a future date at a lower price in the expectation that their price will drop. etc.  using arbitrage . spin-off.merger transaction.

and many use no leverage.that they all use global macro strategies and place large directional bets on stocks. bonds. . less than 5% of hedge funds are global macro funds. commodities.  In reality. currencies. and gold.Popular Misconception  The popular misconception is that all hedge funds are volatile -. while using lots of leverage. Most hedge funds use derivatives only for hedging or don't use derivatives at all.

eliminating the need to correctly time entry and exit from markets.  Adding hedge funds to an investment portfolio provides such diversification not otherwise available in traditional investing .  Hedge funds provide an ideal long-term investment solution.Benefits  Many hedge fund strategies have the ability to generate positive returns in both rising and falling equity and bond markets.  Huge variety of hedge fund investment styles – many uncorrelated with each other – provides investors with a wide choice of hedge fund strategies to meet their investment objectives.  Inclusion of hedge funds in a balanced portfolio reduces overall portfolio risk and volatility and increases returns.

Volatility against each strategy  Word ka document khoolein  Word ka document khoolein  Word ka document khoolein  Word ka document khoolein .

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