Hedge funds are an alternative investment method. It is a form of investment where funds are pooled and invested using different investment strategies to make a profit in a financial partnership between the fund manager and the investor.
The fund manager is called the general partner, and investors are known as limited partners. The role of limited partners is to invest funds, and the general partner manages them. Investors are provided with a protection prospectus that provides information on key aspects of the fund, such as the fund’s investment strategy, type of investment, and leverage constraint.
As the name suggests, hedge funds function in a way that ‘protects’ or avoids risks. Thus, we see that the goal of hedge funds is to maximize profits along with minimizing risk. They are intended to generate profits regardless of market fluctuations. They reduce risk by offering investors to go with long or short stocks. In short, it means earning when stocks fall.
The investment manager manages the assets through a company that is different from the hedge fund and its asset portfolio. The Investment Manager uses the support of the following service providers:
They help clear the trade, provide leverage and short-term financing.
They provide business, accounting and valuation services.
They are basically engaged in the distribution of securities. A distributor can be an insurer, a trader or a broker.
Adopted investment strategies can be classified as:
• Discretionary / qualitative: These are strategies chosen by the general partner or the fund manager.
• Systematic / quantitative: These are the strategies proposed by the computer system.
Characteristics of hedge funds:
• Available only to authorized investors
Investors must have a certain net worth before investing in Hedge funds.
• A variety of investment opportunities
It can be invested in various areas such as land, real estate, stocks, derivatives, currencies, etc.
• Use the lever
Borrowed money is often used to increase yields.
They charge a management fee and a performance 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 correlated with market indices. However, the fact remains that they are prone to a certain degree of risk. Therefore, a good approach is to be aware of all potential risks before investing. It is also important to choose a fund manager with experience in the field.