 |
A "hedge fund" refers broadly to any private pool of capital whose investment manager is compensated primarily on the funds performance. Hedge funds seek superior returns relative to risk by utilizing a broad spectrum of investment styles, hedging strategies, and financial instruments. The manager generally has a significant commitment of personal net worth invested in the fund.
Key Characteristics of Hedge Funds
- Hedge funds utilize a variety of financial instruments to reduce risk, enhance returns and minimize the correlation with equity and bond markets. Many hedge funds are flexible in their investment options (including short selling, leverage, derivatives such as puts, calls, options, futures, etc.)
- Hedge funds vary enormously in terms of investment returns, volatility, and risk. Many, but not all, hedge fund strategies tend to hedge against downturns in the markets being traded.
- Many hedge funds have the ability to deliver non-market correlated returns.
- Many hedge funds strive for consistency of returns and capital preservation, rather than the magnitude of returns.
- Pension funds, endowments, insurance companies, private banks and high net worth individuals and families invest in hedge funds to minimize overall portfolio volatility and enhance returns.
- Most hedge fund managers are highly specialized and trade only within their area of expertise and competitive advantage.
- Hedge funds benefit by heavily weighting hedge fund managers compensation towards performance incentives, thus attracting the best talent in the investment business. In addition, hedge fund managers usually have their own money invested in their fund.
- There are approximately 7000 active hedge funds with an estimated $400-$500 billion under management and growing about 20% per year.
- Includes a variety of investment strategies, some of which use leverage and derivatives while others are more conservative and employ little or no leverage. Many hedge fund strategies seek to reduce market risk by specifically shorting equities or through the use of derivatives.
- Performance of many hedge fund strategies are not dependent on the direction of the bond or equity markets unlike conventional equity or mutual funds, which are generally 100% exposed to the market.
- Hedge fund returns over a sustained period of time have outperformed standard equity and bond indexes with less volatility and less risk of loss than equities.
- Investing in hedge funds tends to be favored by more sophisticated investors and institutions.
Benefits of Hedge Funds
- Many hedge fund strategies have the ability to generate positive returns in both rising and falling equity and bond markets.
- Inclusion of hedge funds in a balanced portfolio reduces overall portfolio risk and volatility and increases returns.
- Academic research proves hedge funds have higher returns and lower overall risk than traditional investment funds.
- Hedge funds provide an ideal long-term investment solution, eliminating the need to correctly time entry and exit from markets.
- Adding hedge funds to an investment portfolio provides diversification not otherwise available in traditional investing.
|
|
|
|
|
 About Hedge Funds
Approach to Risk
Comparison to Mutual Funds
|
