A hedge fund is a form of investment vehicle that uses a number of strategies such as leverage, short selling & derivative to produce returns. Hedge fund management is the professional management of a hedge fund. The ability to employ leverage which allows them to invest more money than they have on hand and the ability to make both long and short investments are two characteristics that commonly define hedge funds. The potential profits from these techniques are bigger than those from conventional investment vehicle but the risk is also higher.
Traders or portfolio managers, who handle investments on behalf of the fund’s clients, are often the people in charge of running hedge funds. They employ a range of investment technique such as:
Long-short: In order to benefit from price fluctuations in either direction, this strategy entails taking both long (buying) and short (selling) positions in various securities or market segments.
Arbitrage: In this tactic, price disparities between several marketplaces or assets are exploited. A hedge fund might, for instance, purchase a stock on one stock market and simultaneously sell it on another, benefitting from the price differential.
Event-driven: With this method, investments are made in response to particular occurrences, such as mergers, acquisitions, bankruptcies and activist activity.
Macro: With this approach, investments are made based on general market, political and economic trends.
Statistical Arbitrage: This quantitative analysis-based method uses mathematical models and algorithms to find patterns in the prices of assets and then takes advantage of those trends to profit.
In comparison to other types of investment funds, such as mutual funds, hedge funds are often only accessible to a small number of accredited investors and are not as strictly regulated. They are therefore regarded as higher-risk investments and can be better suited for seasoned investors who are ready to assume that risk.
Hedge funds can have a variety of structures, including offshore and onshore, open-ended and closed-ended, as well as a variety of fee structures.
