What is a Hedge Fund?

hedge fund

A hedge fund is a substitute in terms of an investment vehicle which is basically available as an option to convoluted investors including individuals as well as institutions holding few substantial assets. Hedge funds are similar to mutual funds which mean that these are purely the puddles of the inherent securities. Similar to mutual funds, hedge funds too can be invested in various types of securities but despite the fact, these both are wide apart in numerous numbers of ways.

It is being aptly said by Neil Smith, the Marketing & Technology Director of StatPro that no matter whether a person love hedge funds or not, unfortunately they are the part of the pension. Furthermore, it is being concluded in news that more investors are looking forward for apportioning their assets to hedge funds as they can distinctly look up for diversification as well as returns. People do have a negative perception about hedge funds but fortunately they manage to produce some rattling returns if the allocated money amount is quite much.

Why Hedge Funds are available to sophisticated investors?

Hedge funds are only available to limited sophisticated investors but why? Firstly, hedge funds are not regulated by U.S. SEC which is an overnight entity of a financial industry at present. Regulation of hedge funds might be coming soon. Secondly, hedge funds are comparatively unregulated unlike mutual funds so these can be invested in the securities under wider range including traditional securities which are risky as well as sophisticated techniques and investments. Thirdly, selling off the hedge funds shares is a real difficult task as these funds look up for generating returns within a “lockup period”, means that during this period the investors cannot sell their shares.

How do Hedge Funds work?

Over the past 15 years, the influence of hedge funds has grown rapidly as investors started allocating their money into funds. These are particularly the collective investments; no matter the market goes up or down, these funds will only make money. At present, these funds are only available to those investors who can invest around £500,000 including insurance companies as well as pension funds. It is obvious that anything associated with an advantage have a risk too which is particularly depends on the strategies which are adopted by the manager but are associated with higher risk.

Rewards of Hedge Funds

Hedge funds aims to offer more financial stability because the investors are compensated as per the returns they earn from their investments and beneficial for those who are frustrated from the performance of mutual funds. These funds have managed to maintain the compensation structure through which the managers are attracted with the above-market returns.

Risks of Hedge Funds

No matter if the managers loses their fund money as they are paid some of the percentage out of the returns. This simply means that the investors are at the verge of risk tolerant which makes their funds at stake. Furthermore, these funds are invested in derivatives which are unfortunately risky too because of leverage.

Do you personally think that hedge funds are an important part of our pension or retirement fund? Please discuss in the comment section below.

Posted in: Investments