What are Hedge
Funds?
Hedge funds are similar to
mutual funds but with several important differences. First,
hedge funds are private funds that are typically only open to
wealthy, experienced investors. Second, these funds generally
take on higher risk using a variety of strategies with the goal
of gaining a higher return than mutual funds. Third, hedge
funds are not regulated by the U.S. government, giving them
more flexibility but less transparency to the public.
Hedging Definition The word "hedge" in hedge funds is somewhat
misleading at the present time. Hedging is a way to reduce risk
in an investment. The first hedge fund was created around 1949,
with the idea of reducing the overall market's affect on a
single asset. Whether the market goes up or down, the value of
the hedged asset should not change very much, ideally. However,
modern hedge funds do not necessarily reduce risk or use
hedging methods. They may use the added leverage of hedging
techniques to hope for very large gains. This, of course, can
also lead to higher losses.
Example of Hedging One way to "hedge your bets" on a stock is
by going long on Company A and short selling Company B in the
same industry, with the same dollar amount invested in each
one. That way, if the industry gets upgraded, A and B will both
go up in price. The value of investment A goes up but the value
of investment B goes down because of the way short selling
works and effectively cancels out the upgrade news. The same
idea would be true of a downgrade. Keep in mind this is a
theoretical idea and market prices often do not match what the
public would expect. In this example, A and B might not exactly
cancel each other out because one company would move more than
the other, which could be good or bad.
Hedge Fund Varieties Now that you
have an idea of how hedging works, it is important to note that
there are hundreds or thousands of ways to use hedging to
reduce risk and/or increase potential profits. That is why
there are an estimated 8,000 or more hedge funds around the
world, each with unique strategies and risk levels. These funds
invest in a wide variety of instruments, including, but not
limited to, stocks, commodities, futures, options, and even
other hedge funds.
Who Can Join Them Not everyone can
join a hedge fund. They commonly require the investor to have a
net worth of $1 million or more, extensive investment
experience, and an acceptance of high risk. These requirements
make the funds sound like strict, exclusive investment clubs,
but there is a good reason for it. The U.S. government has many
regulations on investment firms, which would normally prohibit
some of the trading techniques used by hedge funds. However,
there are some exceptions to these regulations, and hedge funds
operate the way they do by legally taking advantage of these
exceptions. So the funds' requirements are often no more than
the government's requirements for these special
situations.
Transparency Since hedge funds are
not really regulated by the government, they are not required
to make their activities public knowledge. When the investor
joins the fund, he or she is given documentation on the fund's
goals and strategies. After that, the value of the shares or
interests in the fund are usually not updated on a daily basis
but they may be requested on a regular basis. A profit or loss
is not locked in until the shares or interests are sold back to
the investment manager, and dividends are not usually paid
either. Also noteworthy is that the shares or interests are
usually not exchanged between investors in a fund. Finding a
list of hedge funds might also be difficult because the U.S.
government has restrictions on the marketing the funds can
perform, which makes it even more difficult for investors to
find a good one. The good news is that several major financial
publications often list the top known hedge fund performers on
a regular basis.
Risk and Reward Given the fact
that there is little public knowledge about hedge fund
performance, it is difficult to say what the average profit or
loss is every year for the industry. Compounding this problem
is the fact that troubled funds often shut down completely and
start up again under a different name. One main goal of hedge
funds is to deliver a higher return than mutual funds. Whether
that is achieved or not on a regular basis by the average fund
is difficult to say because of this lack of transparency. The
amount of risk could also be much higher than a mutual fund
because of the leveraging techniques used and the lack of
government regulations. This is why the investors are required
to have plenty of money and a willingness to lose a lot of
it.
About the author:
Nicholas Swezey is the creator of
the
href="http://www.howthemarketworks.com
">Stock Market site
HowTheMarketWorks.com.
Be sure to check out these
other popular articles on the stock market.
|
How to
Build Wealth via the Stock
Market
Investing in
the stock market can be an unbelievable way to
develop wealth. Even so, there are many folks
out there who refrain from investing in the
stock market because they believe it’s too
dangerous. And you know what? To a certain
extent, they're right. The stock market can be
one of the most effective ways to build riches,
but only if it is done right.
Read full
article:
How to Build Wealth via the Stock
Market
Tips to Help You Avoid
the Top Pitfalls in Forex
Trading
Are you looking
to learn how to create successful forex trades?
The forex market is the largest and fastest
growing market in the world. With the
availability to trade 24 hours per day around
the world combined with what many people
consider to be a stable investment option, the
forex market has attracted a tremendous amount
of attention in recent years. If you are
learning to trade on the online forex trading
platform, there are several common pitfalls..
Read full article:
Tips to Help You Avoid the Top Pitfalls in
Forex Trading
|
Proven
Methods to Consider When
Investing
When it comes
to successful investing, there really is no one
proven method that consistently works wonders
in the short term.. If there were such a
method, then all of us would be millionaires.
However, there are several methods of investing
that can significantly lower the overall risk
of investing and increase the probability of a
higher return over the longer-term.
Read full
article:
Proven Methods to Consider When
Investing
How to
Trade Currency for Profits
Foreign
exchange trading, also known as Forex trading,
has become more and more popular with investors
and traders these days. With the ongoing
recession in the capital markets, a lot of
folks believe buying and selling of currencies
is a safe investment. Whenever you look at the
mechanics of a currency spot trade, the chance
of making money is somewhere around 50%.
Read full article:
How to
Trade Currency for
Profits
|
|
