When it comes to what hedge fund means, it can be quite difficult to explain exactly what it is. Certainly, in many cases you will find that no hedging techniques have been used. Instead, what you will find is that the various different hedge funds now available will use a variety of different strategies in order to make a profit for those who invest in them.



Most hedge funds today have been set up as a partnership and will consist of only a couple or a number of partners in it. As with all partnerships, there is a general partner and it is this person who manages the funds portfolio for the rest of the partners who have elected to invest in it. The fund manager almost always has his own money invested as well, giving him further incentive to ensure the fund provides good returns. It is the role of the general partner to make decisions with regards to what kinds of hedge fund investing is carried out.

As the manager of the hedge fund portfolio, the general partner aims to produce targeted returns or absolute performance from the investments they make, no matter how the rest of the financial market is doing. As mentioned previously these people will employ several different techniques or strategies to help them achieve their goals. Whereas some prefer to use equity, fixed-income or CTA portfolio strategies, there are some hedge fund managers who prefer to use mathematical algorithms in order to make the right sorts of returns for their investors.

As with all kinds of investment, hedge fund managers are subject to the same rules and regulations of the market as any other trader is. However, the strategies that hedge fund managers use are not so easily available to those who manage regulated entities including mutual funds.

For a manager of a hedge fund to see any kind of absolute return on the investments that they make they need to be flexible. This is one of the reasons why they will incorporate or use different investment strategies or techniques in order to achieve their goals. Below we look at some of the kinds of techniques that these kinds of fund managers will employ.

1. Short Selling - This is where the hedge fund manager will sell a security, which they do not own in order to purchase it a later date for a price that is less than what they sold it at. This, if done correctly, will help them to make a good profit on the initial investment.

2. Arbitrage - With this particular technique, the hedge fund manager will buy and sell the same investment to a number of different markets at the same time. When carried out correctly the manager of the fund that they have made a reasonable amount of profit because of the difference between the prices that they brought and sold the investment for.

Along with the two hedge fund techniques we have mentioned above some managers will also use hedging and leverage in order to get a good return on their investment. Hedging allows them to buy or sell a security that they do own in order to use the funds as a way of offsetting against any loss that the investment may otherwise have made. As for leverage, a manager of a hedge fund portfolio arranges to borrow money so that they can invest in a particular financial product, and the money made from the investment can then be used to pay the borrowed money back.