What is a Hedge Fund
A hedge fund is typically a non-retail fund inviting investment amounts in tunes of billions. Investors of hedge funds are high net worth individuals who invest in scale of crores. Banks, pension funds and institutional investors are some of the typical hedge fund investors. The return of the hedge fund investment is mostly on positive side. The reason behind this is the involvement of fund manager’s own money in the fund.
Since large sum of money is involved, care is taken to develop portfolio which has almost non-volatile funds. Hedge fund is developed by investing in all type of investment opportunities available in the market. Investment opportunities can be low value securities or trading of bonds.
Hedge funds attract performance fees and management fees. A performance fees is calculated on the profit margin earned. Management fees are calculated on the basis of net asset value of the fund. It is mostly 2% of the net asset value.
Hedge funds gained popularity in 1990s when stock market saw the best of its times. The largest hedge funds in US managed around $1.3 trillion collectively. This explains the kind of impact the failure of any fund can make on the market condition. Hedge funds are thus mostly Fund of the Funds as diversification is the most important strategy to minimize the risk.
Hedge fund manager has to be an expert in market analysis. Understanding and anticipating abilities of companies’ moves is very important to play the cards well when managing hedge funds. Producing positive result is an urgent requirement of hedge funds irrespective of the market condition. That is why such strategies are planned which keep the fund performance unaffected by the market condition.
Hedge funds are highly specialized funds and are managed by team of diligent, aware professionals who keep an active eye on the market movements. Fund managers are intelligent enough to switch between funds without wasting time and money on loss making funds. Positive return even in the downturn of the market is the religion followed by hedge fund managers.
Hedge funds require aggressive strategies. In fact, all profit–making opportunities are to be poached upon to reap maximum profits. Hedging is carried out by around 14 strategies ranging from very less volatile to highly volatile investment strategies. Banking, biotechnology, technology are areas which are highly volatile but give high returns. Low performing securities which are almost on the verge of bankruptcy gives fair chance to book considerable profits by creating selling pressure.
Success of hedge funds is correlated to the volatility attached to any strategy followed. That is why mix and match is the best strategy adopted to make the best profits possible. Investing in all types of markets as per the understanding of the situation is the key to the success of hedge funds.