Dictionary definitions of a hedge fund include; a flexible investment company for a small number of large investors (usually the minimum investment is 1 million dollars); can use high-risk techniques or A hedge fund is a private, largely unregulated pool of capital whose managers can buy or sell any assets, bet on falling as well as rising assets, and participate substantially in profits from money invested. It charges both a performance fee and a management fee.
I have no prior knowledge or what Hedge Funds are, who uses them and what service they provide so by researching this topic a little further, these are my findings.
Hedge Funds are open to a limited numbers of investors, typically these will be professional or wealthy investors; essentially it is an investment fund which is able to undertake a wider range of activities which pays out a performance fee to its investment manager. Each investment fund has a different investment strategy which determines which type of investment it undertakes. These could range from shares, debts, commodities etc.
Hedge funds are pooled investments, meaning that investments are made be several investors into the one fund which is over seen by a manager, these investments are then used to invest in publicly traded securities (noncash charitable gift assets).
Hedge funds and mutual funds are similar except that hedge funds seek absolute positive returns whereas mutual funds seek relevant returns on investment, both are based on pooled investments.
Investors into a hedge fund have to be accredited, meaning that they meet a net worth standard this means that fewer investors are required to participate in one hedge fund. Limiting the numbers of investors involved enables hedge funds to go unregistered with the SEC (Securities and Exchange Commission) however hedge funds are prohibited for advertising as an investment opportunity to a general audience.
Hedge funds as part of their absolute returns, indulge in far more aggressive strategies such as short selling, options and leverage.
These explained mean; short selling is a type of financial speculation, alternatively known as naked short selling or naked shorting, short selling is selling of stocks or shares (securities) without even owning them. This involves high risks as the short seller assumes that he will be able to buy his stock at a lower price than which it was sold.
An option involves a financial derivative, a financial derivatives value is determined by the fluctuations of the underlying asset, and the most common underlying assets include stocks, bonds, commodities, currencies, interest rates and market indexes. The derivative itself is simply, a contract between two or more parties, generally used as a derivative instrument to hedge risk, but can also be used for speculative purposes.
And finally leverage which means the borrowing of money to supplement existing funds, such a mortgages, referred to as using borrowed funds in order to increase the equity potential.
However whilst a recession is upon us, hedge funds are becoming less inviting for the net worth investors themselves, finding it increasingly difficult raising the capital to invest in the first place, hedge fund managers are now turning to institutional investors in order to meet investment targets for their hedge funds.
anna stenning researches what hedge funds are, and how they differ so greatly from alternative investment funds.
