Main idea of hedge funds

10 June 2021

The main idea of hedge funds — they tend to benefit from market inefficiencies, in spite of their directions.

Basically, a hedge fund is an investment pool contributed by a limited number of investors and operated by professional managers which invests in different securities and equities that match up with the fund’s goals — mainly to maximise returns and minimise risk, and those who buy in expect the managers to stick to the agreed strategy.

The strategy can have a wide spread of investments: stocks, bonds, mutual funds, also can invest in real estate, patents, food, currency, art, or whatever the fund’s goals can comprise.

In essence, the construction is similar to a mutual fund but that is where the similarity ends. Hedge funds are more aggressive, risky and exclusive than mutual funds.

Hence hedge funds are typically only open to qualified investors, with a certain amount of net worth or income. They expect to make money irrespective of whether the market rises or falls and so are basically market neutral.

They often use leverage to borrow money to amplify returns which adds to the potential risk.

Most hedge fund managers charge performance fees as well as the normal annual management fee. The trading frequency of subscriptions or redemptions for hedge funds is monthly or quarterly, which means they accept investors quite frequently and also once investors have made a redemption request, it could take up to 90 days before they get their money.

Most of them are seeking to generate returns over a “lockup period,” — a period of time during which investors cannot sell their shares.

On the investor’s end, they should confer with a financial expert to be able to understand the potential pros and cons of investing in hedge funds.

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