Hedge funds are an alternative investment method. It is a form of investment where money is pooled and invested using different investment strategies to generate profits in a financial partnership between the fund manager and the investors.
The fund manager is referred to as the general partner and the investors are known as the limited partners. The role of the limited partners is to invest the money and the role of the general partner is to manage it. Investors are provided with a hedging prospectus that provides information regarding key aspects of the fund, such as the fund’s investment strategy, type of investment, and leverage limit.
As the name suggests, hedge funds operate in the manner of “hedging” or avoiding risks. Therefore, we see that the objective of hedge funds is to maximize profit along with minimizing risk. Aim to make profits regardless of market fluctuations. They reduce risk by offering investors to buy long or short shares. Short selling means making money when the stock goes down.
An investment manager manages money through a company that is different from a hedge fund and its own asset portfolio. The Investment Manager uses the support of the following service providers:
It helps in clearing the trade, provides leverage and short term financing.
They provide operations, accounting and evaluation services.
They mainly deal with the distribution of securities. The distributor can be an underwriter, a dealer or a broker.
The investment strategies adopted can be categorized as follows:
• Estimated / Specific: These are the strategies chosen by the general partner or fund manager.
• Systematic/Quantitative: These are the strategies suggested by a computerized system.
Hedge Fund Characteristics:
• Available only to accredited investors
Investors need to have a certain net worth before investing in hedge funds.
• Variety of investment options
They can be invested in different areas such as land, real estate, stocks, derivatives, currencies, etc.
• Use leverage
Borrowed funds are often used to boost returns.
They charge an administration fee and a performance fee.
The main benefit of investing in hedge funds is that the risks are lower than other types of investments. It can be said that it is not related to market indicators. However, the fact remains that they are subject to some degree of risk. Hence, it is a good idea to be aware of all the potential risks before investing. It is also necessary to choose a fund manager with experience in this field.