Hedge Funds - An Overview
(29/3/2005)
Hedge funds are one of the fastest growing investment alternatives to traditional equity and bond portfolios. The term hedge fund is applied to investment vehicles with a wide range of aggressive investment strategies and objectives. Until recently, investing in hedge funds has only been open to the wealthy investors. Now you can invest in a hedge fund through regular contribution savings plans or directly with lump sums of as little as $25,000.
What is the difference between a Hedge Fund and a Mutual Fund?
The main difference between hedge funds and mutual funds is how they are regulated. Mutual funds are one of the most highly regulated investment instruments on the market, while hedge funds have virtually no regulation and investment restrictions. As a result hedge fund managers have more flexibility than traditional mutual fund managers in structuring their portfolios. Hedge funds are also able to use strategies such as futures and currencies. These riskier strategies give them the potential of earning a higher return than traditional mutual funds. Of course, this can also result in a greater loss than what one might traditionally find with mutual funds.
What are the most popular Hedge Fund Strategies?
- Equity Hedge Long/Short - This is one of the most popular hedge fund strategies, where long and short equity securities positions are taken. The overall portfolio may have either a long or a short bias. Equity hedge long/short relies on superior stock selection. Typically, a low degree of leverage is used.
- Futures - Futures are financial contracts for buying or selling a financial or physical commodity, like currencies, stock indexes or oil at a future date. Long and short futures contracts can act to hedge aspects of many fund portfolios. High levels of leverage are often involved in futures.
- Fund of Funds - With fund of funds, a hedge fund invests in other hedge funds rather than directly in stocks, bonds, or other securities. Hedge funds utilized may be of similar strategies, such as equity hedge long/short; or the hedge funds employed may have different strategies. Generally, funds of funds are less volatile than single manager funds.
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