short note on Hedge Funds
Hedge Fund is an aggressively managed portfolio of investments that uses advanced investment strategies such as leverage, long, 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). In other words, A hedge fund is a fund that can take both long and short positions, use arbitrage, buy and sell undervalued securities, trade options or bonds, and invest in almost any opportunity in any market where it foresees impressive gains at reduced risk.
Some of the points relating to Hedge Funds :
1. Hedge fund strategies vary enormously- many, but not all, hedge against market downturns – especially important today with volatility and anticipation of corrections in overheated stock markets.
2. The primary aim of most hedge funds is to reduce volatility and risk while attempting to preserve capital and deliver positive (absolute) returns under all market conditions.
3. The popular misconception is that all hedge funds are volatile – that they all use global macro strategies and place large directional bets on stocks, currencies, bonds, commodities or gold, while using lots of leverage. In reality, less than 5% of hedge funds are global macro funds. Most hedge funds use derivatives only for hedging or don’t use derivatives at all, and many use no leverage.
Benefits of Hedge Funds: There are many advantages of hedge funds. Some of the important advantages are:
1. Many hedge fund strategies have the ability to generate positive returns in both rising and falling equity and bond markets.
2. Inclusion of hedge funds in a balanced portfolio reduces overall portfolio risk and volatility and increases returns.
3. 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. Academic research proves hedge funds have higher returns and lower overall risk than traditional investment funds.
4. Hedge funds provide an ideal long-term investment solution, eliminating the need to correctly time entry and exit from markets.
5. Adding hedge funds to an investment portfolio provides diversification not otherwise available in traditional investing.Main Features Of Hedge Funds: The key characteristics of hedge funds can be stated as follows:
1. Hedge Funds utilize a variety of financial instruments to reduce risk, enhance returns and minimize the correlation with equity and bond markets. Many hedge funds are flexible in their investment options (can use shot selling, leverage, derivatives such as puts, calls, options, futures, etc.).
2. Hedge funds vary enormously in terms of investment returns, volatility and risk. Many, but not all, hedge fund strategies tend to hedge against downturns in the markets being traded.
3. Many hedge funds have the ability to deliver non-market correlated returns.
4. Many hedge funds have as an objective consistency of returns and capital preservation rather than magnitude of returns.
5. Most hedge funds are managed by experienced investment professionals who are generally disciplined and diligent.
6. Pension funds, endowments, insurance companies, private banks and high net woth individuals and families invest in hedge funds to minimize overall portfolio volatility and enhance returns.
7. Most hedge fund managers are highly specialized and trade only within their area of expertise and competitive advantage.
8. Hedge funds benefit by heavily linking hedge fund managers’ remuneration towards performance incentives, thus attracting the best brains in the investment business. In addition, hedge fund managers usually have their own money invested in their fund.
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