A hedge fund is a professionally managed fund that buys securities or other investments with pooled funds. Hedge funds are private funds that are not subject to the same restrictions as public mutual funds, allowing them to take more risks and pursue more complex strategies. However, they must limit their participants to high-net-worth individuals and institutions to qualify for this exemption.
A hedge fund manager may utilise standard investment securities, such as stocks and bonds, as well as non-traditional tactics, such as short positions and derivatives, such as options, to maximise returns and minimise risk. However, hedge funds are riskier than public funds like mutual funds and exchange-traded funds (ETFs) because of their aggressive and speculative nature.
Strategies for Hedge Funds
Alternative assets, such as precious metals, commodities, fixed income swaps, real estate, and art, might be included in hedge fund strategies in addition to specific equities and bonds. Short selling, volatility trading, arbitrage, and leveraged equity are examples of strategies.
Hedge funds are divided into several groups.
- The Managed Futures: Trading a stock, currency, or commodities futures portfolio.
- The Long/Short Equity: Maintaining long positions in some stocks while holding short ones in others is a technique aimed to boost returns while lowering total market risk.
- The Event-Based Strategies: Buying securities of struggling firms, those filing bankruptcy, those likely to combine, or those forecast to be impacted by a specific event in the hopes of profiting when the event occurs is a common practice.
- The Quantitative Approaches: Automated trading based on systematic or algorithmic data analysis may be used.
- The Global Macro Strategies: Analyses worldwide macroeconomic patterns to capitalise on investment possibilities arising from geopolitical events, currency exchange rates, interest rates, or commodity prices.