Hedge funds are a method of alternative investment. This is a form of investment in which funds are pooled and invested using different investment strategies to generate profit in a financial partnership between the fund manager and investors.
The fund manager is called the general partner, and investors are known as limited partners. The role of the commanders is to invest funds, and that of the general partner manages them. Investors are provided with a hedging prospectus 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 operate in a way that hedges or avoids risks. So, we see that the goal of hedge funds is to maximize profits along with minimizing risk. They are designed to generate profit despite market fluctuations. They minimize risk by offering investors to use long or short stocks. The cut means making money when the stock falls.
The investment manager manages the funds through a company that is different from the hedge fund and the asset portfolio. The investment manager uses the support of the following service providers:
They help clear trade, provide leverage and short-term financing.
They provide operations, accounting and valuation services.
They mainly deal with the distribution of securities. The distributor can be an insurer, a dealer or a broker.
The adopted investment strategies can be classified as:
• Discretionary / quality: These are strategies chosen by the general partner or the fund manager.
• Systematic / quantitative: These are strategies proposed by a computerized system.
Characteristics of hedge funds:
• Available only for accredited investors
Investors must have a certain net worth before investing in hedge funds.
• A variety of investment opportunities
You can invest in various areas such as land, real estate, stocks, derivatives, currencies and more.
• Use leverage
Borrowed money is often used to improve returns.
They charge a management fee and an implementation fee.
The main benefit of investing in hedge funds is that the risk is lower than other types of investments. It can be said that they are not related to market indices. The fact is, however, that they are prone to some risk. Therefore, it is a good approach to be aware of all the potential risks before investing. It is also important to choose a fund manager who has experience in this area.