Hedge Funds

Hedge Funds

Hedge fund investments may be a smart strategy to diversify your portfolio and shield against market volatility if you meet the criteria for accredited investors and are prepared to make one-time investments of US$100,000 or more. Yet for the typical investor looking for large returns, investing in index funds that follow significant benchmarks like the S&P 500 is probably a better choice. 

What is a hedge fund? 

Hedge funds are private investment partnerships typically only open to accredited investors. Hedge funds use a variety of strategies to generate returns, including long/short equity, global macro, event-driven, and relative value. Hedge funds typically charge performance and management fees deducted from the fund’s assets. 

Understanding a hedge fund 

Hedge funds are investment vehicles that typically use high-risk, high-return strategies to generate absolute returns (meaning returns that are not linked to the performance of a benchmark index).  

These strategies can include short-selling, leverage, and derivatives trading. While hedge funds can offer potential rewards, they also come with high risk. Investors in hedge funds should be aware of the potential for losses and the limited transparency and regulatory oversight of these types of investments. 

 They do resemble mutual funds or exchange-traded funds (ETFs), but unlike mutual funds, hedge funds don’t have restrictions. They are more likely to use risky investment techniques, including leverage, debt-based investing, and short sales, and they have access to assets that other funds cannot, such as real estate, fine art, and currencies. 

Types of hedge funds 

• Global macro hedge funds 

They are actively maintained funds that look to profit from significant market movements brought on by political or economic events. They don’t take positions in any individual corporations or even industries. They have a macro perspective of the financial world and anticipate those moves. 

• Equity hedge fund 

A global or country-specific equity hedge fund may invest in profitable stocks while protecting itself against equity market declines by selling short overpriced equities or stock indexes. 

• Relative value hedge fund 

Hedge funds are generally relative value funds, which frequently try to employ leverage to increase their returns. These funds will employ margin trading to buy assets they believe are cheap and sell comparable securities they believe are overpriced.  

These funds aim to profit from short-term price variations between related assets by taking advantage of spread or pricing inefficiencies. 

• Activist hedge fund  

These funds invest in firms to increase the stock price by demanding that expenses be reduced, assets are reorganised, or the board of directors be replaced. 

What are the different strategies of hedge fund investing? 

Hedge funds use a variety of investment strategies to generate returns, including long/short equity, event-driven, and global macro. 

 Long/short equity hedge funds  

They take long and short stock positions to profit from rising and falling stock prices.  

• Event-driven hedge funds 

They focus on special situations, such as mergers & acquisitions, spin-offs, and bankruptcies.  

• Global macro hedge funds 

They take positions in various asset classes, including stocks, bonds, currencies, and commodities, to profit from global macroeconomic trends. 

• Fixed-income hedge fund strategy 

This strategy seeks capital preservation while providing investors with stable returns with little monthly volatility by holding short and long positions in fixed-income assets. 

Who should invest in hedge funds? 

The U.S. Securities and Exchange Commission (SEC) imposes restrictions on who can participate in hedge funds due to the greater levels of risk involved. 

 An accredited investor or an institutional investor, such as a pension fund, must be present for an individual to participate in a hedge fund. A net wealth of at least US$1 million, excluding the value of their principal property, or an annual individual income of over US$200,000 (US$300,000 if you’re married), qualifies as an accredited investor. 

Frequently Asked Questions