Hedge Funds

Hedge Funds

Generally speaking, hedge funds are described as pooled investment vehicles. This vehicle uses flexible strategies for the purpose of generating a return. At the same time, this preserves your capital by hedging against market declines, hence the name. Hedge funds are typically considered as an alternative investment fund. A hedge fund trades and invests in various different kinds of assets such as currency, securities, commodities, and other such derivatives on behalf of its clients. Generally speaking, hedge fund clients are wealthy people who can weather the ups and downs of this type of investment, and have an instinct as to when to sell in order to come away from a specific investment with a very respectable profit.

Typically, hedge funds are setup as limited partnerships. The fund manager is designated as the general partner and the investors are the limited partners. They are much more loosely regulated, thereby allowing the fund managers to have a share or partnership in the gains and losses of the money invested. The investment funds tyically have a relatively large fee associated with them, since fund managers usually assess both a performance fee as well as an asset-based fee.

When compared to mutual funds, hedge funds have much greater flexibility in terms of the investment policies they can incorporate and use, and are therefore better able to hedge against downturns in the markets. Additionally, experienced hedge fund management firms are structured such that their funds include both domestic and offshore investments. This practice allow the hedge fund managers the very pronounced advantage of being able to attract capital on a worldwide basis.

There are various investment methods used. Some of these investment methods incllulde short selling, leveraging, and arbitrage. In the process of short selling, this allows the investor to sell stock they do not own for the chance to profit when prices fall. The common practice of arbitrage permits the simultaneous buying and selling of securities in different markets for the purpose of creating a profit from the price differences. And the practice of leveraging means the borrowing of money for investment purposes.

Hedge funds offer the sophisticated investor a diverse, alternative investment option.