It’s a collective investment vehicle, similar to a mutual fund.
Mutual funds are open to anyone, but are restricted in what they can do. The idea is to protect the general public from very risky strategies. In particular mutual funds can’t borrow money to try to enhance returns.
Hedge funds are restricted to only certain types of people - basically rich people. But they can do almost anything they like with the money. The government takes the view that if you’re very rich then you are in a position to take responsibility for risks, and if you lose everything, it’s your own stupid fault.
Beyond that, there is a huge range of types of hedge fund. There’s a perception that they are very risky but try to make enormous profits. This is true of some funds, but is not true in general. Most hedge funds try to earn good but unspectacular returns, but seek to avoid excessive risk.
Most investment funds have performance that is closely tied to the overall market performance. Absolute return targets seek to make money regardless of what the market does. Even if the market is down, they try to make money. Typically their returns are dependable over time, but way well be lower than the long term market average.
Hedge funds seek to extract ‘alpha’ by smart management. That is, they aim to extract a higher return per unit risk than the general market. This might mean they have a lower return than the market, but much lower risk. Or it might mean a higher return. In this sense, they try to offer a better risk/return trade off than a simple index fund.
‘Hedging’ refers to making certain investments to reduce risk. The classic hedge fund might take a view on a very narrow risk where it feels it has expertise, and seek to hedge out other auxiliary risks. For example it might take a long position in one company that it favours, and a short position on the market index. So it is not taking a view on whether the market will go up or down, but just that its favoured investment will do better than the average. Derivatives are very often used for hedging trades. Mutual funds are restricted in their use of derivatives.
Mutual funds are open to anyone, but are restricted in what they can do. The idea is to protect the general public from very risky strategies. In particular mutual funds can’t borrow money to try to enhance returns.
Hedge funds are restricted to only certain types of people - basically rich people. But they can do almost anything they like with the money. The government takes the view that if you’re very rich then you are in a position to take responsibility for risks, and if you lose everything, it’s your own stupid fault.
Beyond that, there is a huge range of types of hedge fund. There’s a perception that they are very risky but try to make enormous profits. This is true of some funds, but is not true in general. Most hedge funds try to earn good but unspectacular returns, but seek to avoid excessive risk.
Most investment funds have performance that is closely tied to the overall market performance. Absolute return targets seek to make money regardless of what the market does. Even if the market is down, they try to make money. Typically their returns are dependable over time, but way well be lower than the long term market average.
Hedge funds seek to extract ‘alpha’ by smart management. That is, they aim to extract a higher return per unit risk than the general market. This might mean they have a lower return than the market, but much lower risk. Or it might mean a higher return. In this sense, they try to offer a better risk/return trade off than a simple index fund.
‘Hedging’ refers to making certain investments to reduce risk. The classic hedge fund might take a view on a very narrow risk where it feels it has expertise, and seek to hedge out other auxiliary risks. For example it might take a long position in one company that it favours, and a short position on the market index. So it is not taking a view on whether the market will go up or down, but just that its favoured investment will do better than the average. Derivatives are very often used for hedging trades. Mutual funds are restricted in their use of derivatives.
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Frequently asked questions
ONEZYPHER © LTD-2021: All rights reserved.
Privacy policy : Terms of use : Our ethics
Frequently asked questions
ONEZYPHER © LTD-2021: All rights reserved.