Hedge Funds - 3 Reasons Why You Can Profit From Them Author: Joel Teo
Hedge fund typically is the part of the investment portfolio that looks for good returns via an active portfolio management. These funds are typically proficiency based investment approach that strives to get the returns depending on the exclusive talent or policy of the trader. The returns obtained are deemed as "definite" because they do not rely on the long-term return of fundamental stock and bond markets. Investors are fascinated to hedge funds for many reasons. Hedge funds have a potential to provide positive returns in all kinds of market environments, they have a low link up to conventional asset classes, and above all they provide way into extremely focused goals that are not generally obtainable through conventional money management.
However U.S. security laws do not regulate these funds, thus are sternly forbidden for publicity. Thus, today the hedge funds are presented as private investment enterprise, and are not prevalent with less than hundred investors. All hedge funds are not suitable for all potential investors and most of them are offered to persons who keep up some particular financial requirements. Before investing in hedge funds, one must determine the investor's appropriateness with regard to his risk tolerance, aims of investment and investment familiarity.
There are many ways to drive profit out of hedge funds. First of all, hedge funds is a supervised pool of investments for institutions or prosperous individual investors that take into account one of the many trading tactics in equities, bonds or derivatives, endeavoring to profit from market inadequacy and to some degree hedge underlying risks. Hedge funds are generally insecurely coordinated and typically are much less see-through than conventional investment funds. This feature helps them to trade in a hidden manner. The hedge funds usually have small investments periods, and allege fees that depends both on funds under administration and on functioning. It is a flaw on the part of investors to treat hedge funds under the asset class; rather the investment community treats these funds as an assortment of trading approaches. The right decision of hedging policy for an individual investor depends principally on its offered portfolio. So if the portfolio is such that it shows heavy investments in equities, then the hedging strategy that is sought is to offset equity risk. By now it might be obvious that argument of comparative returns between hedge-funds strategies can be deceptive.
Secondly, hedge funds use investment policies that are generally prohibited for more conventional funds like borrowing shares to sell them in the anticipation of purchasing them back afterwards at a reduced price and using big power through borrowing. However, the preferential plans are likely to change. Before 2006 the hedge funds were equity driven but now in 2006 the scene is diverse. Here another term used is global macro where one invests in shifts between global economies, often using spin-offs to contemplate on interest-rate or currency shifts.
Thirdly, you can reap substantial profits by following certain strategies. These include the convertible arbitrage which requires moving deeply ahead in the convertible securities which are shares or bonds that are then swapped for a particular number of other form, generally the common shares, at a predetermined rate and at the same time shorting the principal equities. This is an old and effective strategy of the past but now it seems to lose its luster. Another policy is to invest in emerging markets where one can invest in securities of companies of the rising economies by purchasing bonds or shares. Another hedge fund involves investing in a "Hedge Fund Basket". Here some funds will concentrate on single strategies and others will follow compound strategies. But these funds have a high fee structure. You can remain market neutral where equal quantity of capital is invested long and short in the market with an effort to counteract risk by buying underrated securities and taking short place in overvalued securities.
Understand clearly the terminology in working with hedge funds, which is ever changing and it will work for you in 2007.