Hedge Funds are an alternative investment method. It is a way of investing where funds are pooled and invested using different investment strategies to generate profits in a financial partnership between fund managers and investors.
The fund manager is called a general partner and the investor is known as a limited partner. The role of the limited partners is to invest the funds and the main partner is to manage them. Investors are provided with a hedging booklet that provides information on key aspects of the fund, such as the fund’s investment strategy, type of investment, and leverage limit.
As the name suggests, hedge funds work to “cover” or avoid risks. So we see that the goal of hedge funds is to maximize profits while minimizing risk. Market fluctuations are for profit. They reduce risk by offering investors to make long or short stocks. Shorting means making money when the stock goes down.
An investment manager manages funds through a company that is separate from the hedge fund and its portfolio of assets. The investment manager uses the support of the following service providers:
They help clean up the trade, leverage and provide short-term financing.
They provide operations, accounting and valuation services.
Basically, they are responsible for the distribution of values. The distributor can be a signatory, distributor or broker.
The investment strategies adopted can be classified as follows:
• Discretionary / Qualitative: These are strategies chosen by general partners or fund managers.
• Systematic / quantitative: These are the strategies proposed by a computer system.
Hedge Fund Features:
• Only available to accredited investors
Investors must have a certain net worth before investing in hedge funds.
• Plenty of investment opportunities
It can be invested in a variety of areas, such as land, real estate, stocks, derivatives, currencies, and more.
• Use the lever
The money borrowed is used to improve profits.
They charge a management fee and a performance fee.
The main advantage of investing in hedge funds is that the risk is lower than other types of investments. It can be said that they are unrelated to market indices. However, the fact is that they tend to be at risk. Therefore, it is good to be aware of all potential risks before investing. Choosing a fund manager with experience in the field is also essential.