An Outline of Hedge Funds

Hedge Funds Any private asset fund, having a mostly unregulated pool of capital, whose directors can buy or sell any assets, make speculative trades on falling as well as rising assets, and partake substantially in profits from money invested, can be called a hedge fund. These investment funds in the United States must be restricted to a certain amount of qualified investors in order to be exempt from direct regulation.

Hedge funds use the money collected from their clients as collateral to borrow more money. They invest this entire amount in the market, effectively taking on an overall exposure much greater than its net asset value – this is known as leveraging. Hedge funds use various types of loans for leveraging; including uncollateralized and securitized loans, and margin accounts.

Investment returns, volatility, and risk differ greatly among the various hedge fund strategies, and so it is vital that you know these strategies. They include:

• Aggressive growth – these funds invest in equities expected to experience acceleration in growth of earnings per share
• Distressed security – purchases equity, debt or trade claims at deep discounts of businesses in or facing bankruptcy or reorganization
• Emerging markets – invests in equity or debt of up-and-coming markets which are inclined to have higher inflation and volatile growth
• Fund of Funds – mixes and matches hedge funds and other pooled investment vehicles
• Income – invests with key focus on yield or current income rather than exclusively on capital gains
• Macro – seeks to benefit from adjustments in global economies, usually brought about by changes in government policy which influence interest rates, in turn affecting currency, stock and bond markets
• Market neutral/arbitrage – tries to evade most market risk by taking offsetting positions, often in different securities of the same issuer
• Market neutral/securities hedging – invests equally in long and short equity portfolios generally in the same sectors of the market
• Market timing – assigns assets among different classes depending on the manager’s view of the economic or market position
• Opportunistic – event-driven opportunities cause the investment theme to vary from strategy to strategy as chances arise to profit from events such as IPO’s, unexpected price changes frequently caused by an interim earnings disappointment, and hostile bids
• Multi strategy – investment method is diversified by using a variety of strategies all at the same time to achieve short- and long-term gains