Hedge Fund
Candlefocus EditorMost hedge funds are independently managed by a fund manager who oversees the day to day operations of the fund and is responsible for strategizing investments in the markets to achieve the desired objective. Funds typically invest in a variety of asset classes and use a variety of strategies both simple and complex.
One of the key features of hedge funds is that they invest for a wider range of objectives than mutual funds. The primary objective of both may be to maximize returns, but hedge fund strategies are much more comprehensive. Hedge funds can pursue strategies that may include absolute return strategies, capital preservation strategies, event driven strategies, relative value strategies, and long/short strategies.
A common strategy used by hedge funds is to take a “long” position in an asset such as stocks, commodities or currencies, while also “shorting” or taking a short or reverse position in another asset. By taking this approach, the fund manager could make a profit if the long position increases in value, while still making a profit if the short position decreases in value - a technique known as hedging.
Hedge fund investing is typically targeted at high-net-worth individuals with strong financial backgrounds as they take more risk than traditional mutual funds. As a result, the minimum investment and net worth requirements are relatively high compared to retail investments. Additionally, hedge funds charge higher fees than conventional funds, usually in the form of a “2 and 20” structure. A “2 and 20” structure refers to a 20% performance fee on profits and a 2% management fee on assets under management.
Hedge funds are a popular choice for investors looking for an aggressive approach to investing. With the wide range of strategies and assets a hedge fund can take, there is much potential for high returns. However, this potential for higher returns also comes with greater risk - and with potential large losses depending on how the markets move. As a result, due diligence and careful research into the particular fund and strategy should be conducted before investing in hedge funds.