With the recent SEC crackdown on some famous hedge funds, there has been a growing interest in these mysterious-sounding entities. Read on the learn more about what they are and what they do.
What exactly are they?
Hedge funds are an organization, usually in the form of privately held companies whose sole purpose is to grow their clients’ initial investment by taking advantage of movements in the price of financial instruments. Despite their name, most hedge funds today do not, in fact, “hedge” their risk and instead rely on an incredibly diverse number of strategies to make money. The first hedge fund is believed to have been started during the U.S. bull market of 1920s.
What types of strategies do they use?
The varieties of strategies that hedge funds use are as numerous as there are funds. Most have been started by financiers who believed that they had an “edge” over the rest of the market. Many hedge funds execute both short and long trades, meaning their bets on the increasing value of an instrument will equal in number to their bets on the decreasing value of an instrument. Some hedge funds may focus on equities, or stocks, while others may focus on commodity futures and options. There are some whose strategies depend on more exotic instruments, such as market volatility indices.
Aren’t hedge funds and mutual funds the same?
Although both types of funds aim to grow their clients’ account value, hedge funds tend to be more aggressive in their trading strategy. Another major difference between a mutual fund and hedge funds is the fact that mutual funds do not usually make bets that the value of that instrument will go down, or “short” instruments, whether it be a stock, futures contract, or governments bonds. On the other hand, hedge funds usually try to do whatever they can do gain an advantage over other market participants, including shorting financial instruments.
So how can I get in on the action?
Most hedge funds are not accessible to the general public. Some also require that you have some minimum amount of disposable assets, usually starting at a minimum of $100,000. Furthermore, hedge funds do not usually advertise their services, limiting knowledge of their existence. To learn more about the financial possibilities that await you when you invest in hedge funds, consult an asset management company – one that is equipped with state-of-the-art management software, and boast of compliance to the industry’s strict regulations.
