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getting a grip on hedge fund investments

Feb 29, 2008
Actually defining what hedge fund means can be extremely difficult to do. This is because in a lot of cases where hedge funds have been set up no hedging techniques have been used. What instead happens is that those who control the hedge fund employ a number of different strategies or techniques in order to make a profit for those who choose to invest in such funds.

Most of the hedge funds that are available today are usually structured as a partnership, where the general partner is the one that manages the portfolio. It is this partner who is the one who will make the decisions with regards to hedge fund investing, whereas the rest of the partners in the partnership will be the ones who are actually making the investment. This financial market does not have nearly as much of the red tape and regulatory restrictions that similar investments, such as mutual funds have.

The manager of the hedge fund is required to produce targeted returns or an absolute performance in relation to the portfolio no matter what is happening in relation to the rest of the financial market. These are people who will use a number of different strategies in order to achieve their goals and to ensure that they make the soundest investments possible for the funds investors. Some look at using equity, fixed-income or CTA portfolio strategies, whilst others prefer to use mathematical algorithms in order to get the right returns.

But as with any kind of investment, a person who manages a hedge fund is still subject to the same financial rules and regulations that cover any kind of financial trading. But the strategies that they use in order to make their returns are not as easily accessible to other traders who manage regulated investments like mutual finds. Therefore, the risk you make when investing in hedge funds is much higher, although at the same time your returns can be much greater and you have more flexibility due to lack of regulation.

For a manager of a hedge fund to see any kind of absolute return on the investments that they make they need to be flexible. This is one of the reasons why they will incorporate or use different investment strategies or techniques in order to achieve their goals. Below we look at some of the kinds of techniques that these kinds of fund managers will employ.

1. Short Selling - This is where they sell a security that they do not own, and which they hope to purchase at a future time for a reduced price. So this should help to make a considerable increase on the investment.

2. Arbitrage - With this particular technique, the hedge fund manager will buy and sell the same investment to a number of different markets at the same time. When carried out correctly the manager of the fund that they have made a reasonable amount of profit because of the difference between the prices that they brought and sold the investment for.

Along with the two hedge fund techniques we have mentioned above some managers will also use hedging and leverage in order to get a good return on their investment. Hedging allows them to buy or sell a security that they do own in order to use the funds as a way of offsetting against any loss that the investment may otherwise have made. As for leverage, a manager of a hedge fund portfolio arranges to borrow money so that they can invest in a particular financial product, and the money made from the investment can then be used to pay the borrowed money back.
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