Hedge funds are a unique type of investment vehicle, governed by professional fund managers that work to identify opportunities through research and analysis of companies, sectors, macroeconomic trends, and beyond with the aim of specifying possibilities for generating high returns. The name "hedge fund" comes from the fact that they originally aimed to hedge against market risk by going both long and short on various assets. Hedge funds manage large
, across global markets. Some funds are very aggressive while others take a more conservative approach. The goal is to maximize the
Hedge fund strategies
There are
numerous hedge funds worldwide each following a variety of strategies including equity long/short, macro, and relative value arbitrage, all have provided varying levels of returns. The equity long/short strategy involves taking both long and short positions in stocks to profit from rising and falling prices. Macro funds analyze global macroeconomic trends and plan accordingly. Relative value arbitrage looks to take advantage of pricing discrepancies between related securities. These strategies, when executed by skilled managers, have provided
positive rates of return in the past. However, past performance doesn't guarantee future results as net performance is impacted by several factors such as strategy implantation, domicile, and costs in the form of fees, inflation, and taxes. Reviewing the
mean net performance on an annualized basis can provide a general insight into hedge funds performance and the operating environment.
Fund flow also provides insight into the operating of hedge funds, as outflows indicate investors have pulled assets from specific investment region or assets class, while inflows show a rise in capital.
How hedge funds differ from traditional mutual funds
Hedge funds and mutual funds may seem similar however they have distinct operating differences. Hedge funds are overseen by fewer regulations than other types of funds, allowing managers to use strategies like short-selling, leverage, and derivatives.
Mutual funds operate under stricter rules that limit their flexibility. Hedge funds generally charge higher fees typically following the
two and 20 fee structure. Mutual funds typically have expense of ratios around one percent. While mutual funds are accessible to all types of investors, hedge funds require accredited investor status and higher buy-ins. The exclusivity and complexity of hedge funds cater to institutional investors. These operational differences lead mutual funds to be much more transparent in disclosing their holdings regularly; however, hedge funds are not subjected to the same reporting requirements.
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