Hedge funds are an alternative investment method. It is a form of investment in which funds are pooled and invested using different investment strategies to generate profits in a financial partnership between the fund manager and the investors.
The fund manager is known as the general partner and the investors are known as limited partners. The role of the limited partners is to invest funds and that of the general partner is to manage them. Investors receive a cover prospectus that provides information on key aspects of the fund, such as the fund’s investment strategy, investment type and leverage limit.
As the name suggests, hedge funds work to “hedge” or avoid risk. So we see that the goal of hedge funds is profit maximization along with risk minimization. They are intended to generate profit regardless of fluctuations in the market. They minimize risk by offering investors to go long or short stocks. Shorting involves making money when stocks fall.
An investment manager manages the funds through a company that is separate from the hedge fund and its portfolio of assets. The investment manager uses the support of the following service providers:
main corridors
They help settle trades, provide leverage and short-term financing.
administrators
They provide operations, accounting and valuation services.
dealers
They basically deal with the distribution of values. A dealer can be an underwriter, dealer, or broker.
The investment strategies adopted can be classified into:
• Discretionary/Qualitative: These are strategies selected by the general partner or fund manager.
• Systematic/Quantitative: These are strategies suggested by a computerized system.
Characteristics of hedge funds:
• Available only to accredited investors
Investors must have a certain net worth before investing in hedge funds.
• Variety of investment options
It can be invested in various areas, such as land, real estate, stocks, derivatives, currencies, etc.
• Use leverage
Borrowed money is often used to improve returns.
• Fairy
They charge a management fee and a performance fee.
The main benefit of investing in hedge funds is that the risk is lower than in other types of investments. It can be said that they are not related to market indices. However, the fact is that they are prone to a certain amount of risk. Therefore, it is a good approach to be aware of all potential risks before investing. It is also essential to select a fund manager who has experience in the field.
