In the world of finance, where big money is at stake, a few select entities have gained legendary status. Operating with secrecy, they manage huge sums of money using unique strategies that often seem like financial magic. These are hedge funds. But what exactly are hedge funds, and how do they differ from traditional investment options.
WHAT ARE HEDGE FUNDS?
Developed in the U.S. in 1949, hedge funds became popular in the 1980s and are now essential parts of institutional and private portfolios. Their primary goal is to provide returns that aren't tied to traditional market performance, offering valuable diversification.
TRADITIONAL VS. HEDGE FUND INVESTMENTS
Traditional asset managers typically invest in stocks, bonds, and cash, aiming to outperform a passive benchmark. Their portfolios are "long-only" and often struggle to perform well in declining markets, as they have limited strategies to hedge against downturns.
In contrast, hedge funds seek to manage risk through a broader range of strategies, such as short selling, leveraging, and arbitrage. The skill of the manager plays a crucial role in generating returns, making hedge funds more adaptable and potentially more profitable in both rising and falling markets.
In contrast, hedge funds seek to manage risk through a broader range of strategies, such as short selling, leveraging, and arbitrage. The skill of the manager plays a crucial role in generating returns, making hedge funds more adaptable and potentially more profitable in both rising and falling markets.
Hedge fund managers have more flexibility to invest in diverse financial instruments, offering better opportunities for risk management and diversification.
BENEFITS OF HEDGE FUNDS
- Consistent performance: Hedge funds focus on absolute returns rather than outperforming a benchmark.
- Low correlation: Their diverse strategies often result in returns that are not closely linked to traditional investments, adding diversification.
- Downside protection: Hedge funds use strategies like short selling to potentially profit from market declines.
RISKS OF HEDGE FUNDS
- Loss of investment: Hedge funds carry the risk of losing money.
- Liquidity issues: Funds may be locked up for long periods, limiting access.
- Leverage & fees: Hedge funds often use leverage to amplify returns, and they charge higher fees compared to traditional investments.
- Limited regulation: Hedge funds are less regulated, meaning investors may have fewer protections.
HEDGE FUND STRATEGIES
- Equity hedge: Long and short positions in undervalued and overvalued stocks.
- Managed futures: Trading futures and derivatives across various asset classes.
- Event-driven: Exploiting opportunities from corporate events like mergers and acquisitions.
- Global macro: Capitalizing on macroeconomic trends.
- Relative value: Exploiting price discrepancies between related securities.
CONCLUSION
Hedge funds offer potential for higher returns and diversification but come with higher risks and fees. They are suitable for sophisticated investors seeking to diversify their portfolios and are willing to accept more volatility. Always consult a financial advisor to determine if hedge funds align with your financial goals and risk tolerance.
HOW TO INVEST?
Open a free brokerage account with Unibank Invest and start investing. The Unibank Invest app provides access to the world’s largest stock exchanges, enabling you to purchase international investment instruments, such as stocks, bonds, and ETFs.
To open a brokerage account, fill out the online application or call +374 43 004 382.