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What are hedge funds and should we invest in this type of fund?

Feb 29, 2008
They are usually structured as partnerships with the general partner being the portfolio manager, making the investment decisions and the limited partners as the investors. These funds are subject to the same market rules and regulations as any trader.They use advanced investment strategies such as leverage, long, short and derivative positions in both international and domestic markets with the aim to generate high returns.

Hedge funds are expected to offer profit potential in both rising and falling markets.They are usually less highly regulated than traditional funds.

Prior to investing in this type of fund, it is vital to have a basic understanding of the characteristics of the different Hedge fund strategies. Most hedge funds provide you all possible strategies for a safe investment.

1. Long/short or Hedged Equity Strategies: This is considered to be the largest category of hedge funds in terms of numbers.

2. Relative value strategy: These funds are often considered as market neutral since there is little or no market related element to their returns.

3. Event Driven Strategy: It seeks to anticipate and profit from price movements that arise from specific corporate events, such as take over and mergers.

4. Tactical Trading Strategy: These are the highest risk of all hedge funds as a sector.

These strategies are not as easily accessible. Most often, hedge funds are set up as private investment partnerships legally that are open to a limited number of investors and need a very large initial minimum investment. Investments made in hedge funds are illiquid since they require investors to keep their money in the fund for a minimum period of at least one year. Unlike mutual funds, hedge funds are unregulated since they cater to sophisticated investors.

Investors should note that hedging is basically the practice of attempting to reduce risk, but the goal of most hedge funds is to maximize return of investment. Use of different strategies avoids hedging risks.

Hence it is evident that with better returns and risk, hedge funds are superior to mutual funds and there are increasing amount of evidence that shows the benefits of considering hedge funds as an asset class at the strategic asset allocation level.

Hence investors should understand that the hedge fund promise of pursuing absolute returns means hedge funds are liberated with respect to registration, investment positions, fee structure and liquidity. Liquidity is the main concern for investors. So go ahead and invest for good returns.
About the Author
Mark Plummer is a UK based independent Offshore Investment advisor.Has been involved in the financial services and financial planning business since leaving full time education.Before you decide how you want place your funds please visit this Hedge Fund
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