Hedge Fund: What Is It, Types And How Does It Work?
As investors or new into investments, you might encounter a term of ‘hedge fund’. But do you know what is hedge fund and how does it work? Check this out to learn more about it!
Definition of Hedge Fund
A hedge fund is a limited partnership of private investors whose money is managed by professional fund managers. They usually use a variety of tactics to produce above-average investment returns, such as leveraging or trading non-traditional assets.
Hedge fund investment is considered as a risky investment option. It requires a large minimum commitment or net worth and frequently targeting wealthy client.
What Does It Do?
The phrase “hedge fund” refers to an investment where the fund manager frequently creates a hedged bet by investing a portion of assets in the opposite direction of the fund’s emphasis to counter any losses in its core holdings. Hedge funds use riskier strategies, leverage assets, and invest in derivatives such as options and futures.
A hedge fund investor is generally referred to as an accredited investor, which requires a certain level of income or assets. The examples for this are institutional investors, such as pension funds, insurance firms, and affluent individuals.
Hedge fund investments are illiquid because they frequently require investors to retain their money in the fund for at least one year. Withdrawals may also be made only at specific intervals, such as quarterly or biannually.
Type of Hedge Funds
There are four common types of hedge fund that you should know :
1. Global macro hedge funds
It is actively managed funds that seek to profit from large market fluctuations brought by by political or economic events.
2. Equity hedge fund
It might be global or country-specific, investing in profitable stocks while hedging against equity market downturns by shorting overvalued equities or stock indices.
3. Relative value hedge fund
It aims to profit from temporary price discrepancies in related assets by exploiting price or spread inefficiencies.
4. Activist hedge fund
It invests in firms and take steps that increase stock price, such as demanding that corporations decrease expenses, restructure assets, or alter the board of directors.
Interested in Hedge Fund?
Hedge fund investment is considered a risky alternative investment choice and requires a high minimum investment or net worth from accredited investors. Hedge fund techniques include investments in debt and equity securities, commodities, currencies, derivatives, and real estate. The SEC regulates hedge funds only lightly, and they make money through a 2% management fee and a 20% performance fee structure. If you are interested in other investment, make sure to learn it carefully before investing.
