What is a Hedge Fund?
A hedge fund is a fund that can take both long and short positions, use arbitrage, buy and sell undervalued securities, trade options or bonds, and invest in almost any opportunity in any market where it foresees impressive gains at reduced risk. A hedge fund can hedge against downturns in the markets — especially important today with volatility and anticipation of corrections in overheated stock markets. The primary aim of most hedge funds is to reduce volatility and risk while attempting to preserve capital and deliver positive returns under all market conditions.
There are approximately 14 distinct investment strategies used by hedge funds, each offering different degrees of risk and return. It is important to understand the differences between the various hedge fund strategies because all hedge funds are not the same — investment returns, volatility, and risk vary enormously among the different hedge fund strategies.
Some strategies which are not correlated to equity markets are able to deliver consistent returns with extremely low risk of loss, while others may be as or more volatile than mutual funds.
The hedge funds are estimated to be a $900 billion industry and growing at about 20% per year with approximately 9000 active hedge funds.
Why Invest in a hedge fund?
Hedge funds vary enormously in terms of investment returns, volatility and risk. Many, but not all, hedge fund strategies tend to hedge against downturns in the markets being traded. Many hedge funds have the ability to deliver non-market correlated returns. Many hedge funds have as an objective consistency of returns and capital preservation rather than magnitude of returns. Performance of many hedge fund strategies, particularly relative value strategies, is not dependent on the direction of the bond or equity markets — unlike conventional equity or mutual funds (unit trusts), which are generally 100% exposed to market risk.
Benefits of Hedge Funds
Many hedge fund strategies have the ability to generate positive returns in both rising and falling equity and bond markets. Inclusion of hedge funds in a balanced portfolio reduces overall portfolio risk and volatility and increases returns. Huge variety of hedge fund investment styles ・many uncorrelated with each other ・provides investors with a wide choice of hedge fund strategies to meet their investment objectives.
What is a Fund of Hedge Funds?
A successful fund of funds recognizes these differences and blends various strategies and asset classes together to create more stable long-term investment returns than any of the individual funds. A diversified portfolio of generally uncorrelated hedge funds. May be widely diversified, or sector or geographically focused. Seeks to deliver more consistent returns than stock portfolios, mutual funds, unit trusts or individual hedge funds.