Hedge funds for dummies

Hedge Fund, a term coined by the Australian author, financial journalist and sociologist Alfred Winslow Jones, first made entry into the finance dictionary in the 1940s. It was an innovative strategy that is meant to offset financial risks by using strategies involving options, combined with leverage and long and short selling, so as to negate the effects of market swings. Basically the hedge fund for dummies is there to reduce risk and ensure a maximum rate of return. Often used with swaps, futures and arbitrary strategies, hedge funds, in a way, diverse away some of the risk on the investors in the stock market.

The characteristics of Hedge funds for dummies can be briefed as follows,

  • Hedge funds for dummies are generally set up in the form of private investment partnerships and usually have less than 100 investors. Compared to standard forms of investment vehicles, they have less liquidity and high investment minimums.
  • Withdrawals are permitted only on quarterly or monthly termination notice.
  • Hedge funds for dummies are subjected to less regulation as opposed to the investment vehicles offered to a common man.

Hedge funds for dummies are mainly classified in to three groups, which is again subdivided into any where between 8-25 clear investment techniques, each having its own risk and return prospects. The main classifications are, trading oriented or (macro) funds, arbitrage oriented (relative value) funds, and equity hedged, which includes market neutral and equity long or short funds.

Hedge funds for dummies are opaque when it comes to underlying holdings. That is, as managers don’t disclose details on hedge funds on a regular basis (in order to protect trading strategies), it will be difficult to draw a detailed analysis on hedge funds. Hence industry statistics is less reliable in the case of hedge funds.

Hedge funds are suitable for those very high risk adjusted returns. Generally, hedge fund managers concentrate on a very narrow field, mainly trading in a small number of securities in a given market. It is seen that hedge fund for dummies trade actively in derivatives market and upgrades manager’s perks to performance incentives.

Hedge fund managers are very flexible in their strategies and uses arbitrage, long and short positions and sell bonds or trade options and distressed securities in any given opportunity in the market, if he/she feels that there is a scope for large gains at less risk.

Most hedge fund for dummies focuses on capital consolidation and delivery of positive returns, independent of market cycles. The risks associated with hedge fund for dummies pertain to financial integrity of the entire process as well as the compliance levels the investment requires.

One needs to have a minimum expertise to manage hedge funds. Its volatility, profits, and risk levels vary vastly and hence the potential strategies. And to make the most out of it, one need to be alert and quick in his/her decisions. Good Luck and re-invent the investor in you.