Hedge funds are largely unregulated pool of liquid capital that is private and whose managers can at anytime buy or sell any assets or bet on falling as well as rising assets, and also participate substantially in any profits from the money invested in the funds. The fund is typically open only to very wealthy and qualified investors with its activity in the public securities market growing substantially, accounting for approximately 10 % of all U.S. fixed-income securities transactions, 35% of U.S. activities in derivatives with investment-grade ratings, 55% of the trading volume for emerging-market bonds, and 30% of equity trades. Hedge funds have quickly become a dominant player in the world of debt. In some corners of the market?often among the most complex areas?they are the biggest force by far. Hedge funds are responsible for nearly 30% of all U.S. fixed-income.
?Hedge fund? has no uniformly accepted meaning, but it commonly refers to a professionally managed pool of assets that are used to invest and trade in equity securities, fixed-income securities, derivatives, futures and other financial instruments. Participation in a hedge fund typically is restricted to relatively wealthy individual and institutional investors that satisfy private offering standards. Inclusion of ?hedge? in the term is useful for distinguishing a hedge fund from another type of investment pool (such as mutual fund, a venture capital fund, a private equity fund or a commodity pool), but has little descriptive value'a hedge fund may or may not hedge against risks.
Some hedge funds invest only in securities and only for long term, whereas some hedge funds never invest at all, but only trade to profit market or security depreciation. Some long-short hedge funds sell securities short to guard against risks in their long investment; some sell securities short opportunistically to profit from expected declines in the prices of the securities; and some do both. Some hedge funds trade in put and call options or futures contracts to hedge; others do so hoping to profit from directional security or market bets. Some hedge funds are fundamental investors, while others rely on technical analysis. Some hedge funds invest and trade only distressed debt instruments. Some attempt to take advantage of pricing discrepancies between different markets in the same instruments through any of an array of arbitrage strategies. Some hedge funds specialize in exotica of currency trading, while some refuse even to consider security that is not denominated in U.S. dollars.
Hedge funds thus do not represent an asset class or any particular style of portfolio management. The investment philosophies of hedge funds are as diverse as their portfolio managers. Hedge fund investments techniques and methods represent their managers individual experiences, background and biases. Thus, it is not wrong to say that hedge funds in this vast financial market keep popping everywhere.
In essence , it is a managed pool of capital for institutions or wealthy individual investors that employes one of various trading strategies in equities, bonds or derivatives , attemting to gain from market inefficiencies and , to some extent hege underlying risks.
Hedge funds are often loosely regulated and usually are much less transparent than traditional investment funds. That helps them to trade more stealthilyt. Funds typically have minimum investments periods, and charge fees based both on funds under management and on performance.
Many experts contend it is a mistake to talk about hedge funds as an assett class : rather the industry embraces a collection of trading strategies. The appropriate choice of hedging strategy for a particular investor depends largely on its existing portfolio; if for example , it is heavily invested in equities, it might seek a hedging strategy to offsett equity risk. Because of this, discussion of relative returns between hedge-funds strategies can be misleading.
Hedge funds use investment techniques that are usually forbidden for more traditional funds , including "short selling: stock - that is borrowing shares to sell them in the hope of buying them back later at a lower price - and using big leverage rhrough borrowing.
The favoured strategies tend to change. It has been said that the hedge-fund industry was equity driven but that now in 2006 there is less long/short. It seems to be a much more diverse picture in 2006 with less of a concentrated exposure format.
Some of the most common strategies include
Convertible arbritrage : This involves going long in the convetible securities ( that is usually shares or bonds) that are exchangeable for a certain number of another form ( usually common shares) at a preset price , and simultaneously shorting the underlying equities. This strategy previously was very effective and was a standard. However this type of action seems to have lost effectiveness and seems to have lost favour in the crowd.
Emerging markets : Investing in securities of companies in the ever emerging economies through the purchase of sovereign or coporate debt and /or shares.
Fund of funds : Inveting in a "basket" of hedge funds. Some funds of funds focus on single strategies and other pursue multiple strategies These funds have an added layerof fees.
Global Macro - Investing in shifts between global economies , often using derivatives to speculate on interest-rate or currency moves.
Market neutral : Typically , equal amounts of capital are invested long and short in the market, attempting to neutralize risk by purchasing undervalued securities and taking short positions in ovevalued securities.
As you can see the terminolgy in dealing with "hedge funds " is both everchanging and confusing.
You should be fluent in both the language and the concepts in order that you can discuss and make intelligent rather than confused choices in your investments.
Remember it is you and not your broker / adviser who will pay the ultimate costs of negligent comprehension and investment planning.
Both Lalit Sharma & Bill K. Piker Piker are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.