The term ‘hedge fund’ was used traditionally to refer to funds that applied hedging techniques in tehr functions. The term stuck and it is still used presently even though the firms do not necessarily practice hedging. A hedge fund is a financial firm created by amassed investment that has the structure of a limited liability company or limited partnership. Hedge funds use a number of financial instruments and investment styles and invest in a variety of markets.
The general public has no access to the hedge fund. It is only made available to a selected few including accredited and sophisticated investors. This fact has made hedge funds to operate with more flexibility in comparison to other financial and investment institutions. Hedge funds do not also have to worry about licensing requirements applicable to other investment institutions. They have the privilege of avoiding direct regulatory oversight.
Hedge funds have continued to grow as major drivers in the economic industry as major sources of capital and investment vehicles. Investors find the fund very helpful. The hedge fund is open ended and so the investor enjoys the convenience of monthly or quarterly additions or withdrawals at their own pleasure.
The value of a hedge fund is calculated as the net asset value. This means that when the value of the fund decreases, the investor will also be able to only withdraw a lower amount. Although most hedge funds are trying to find ways to make the net asset value stay afloat even with the rise and fall of global economic markets. That way the investor has absolute assurance or absolute return regardless.
There exist various regulatory gaps that hedge funds enjoy since they are not owned by the public. Retail investors and managers have traditionally determined the structure of the fund. They also play the sole role of determining who is employed and what strategies and techniques are used to run the funds. In the past the United States has tried to suggest several bills to find a way to regulate the functioning of the hedge funds with no avail. Te last attempt was during and after the 2008 credit crisis in Europe.
Hedge funds have highly evolving strategies and also a wide variety of them. Basically, hedge funds fall into four main groups. Including:
Directional investment strategies
Directional investment strategies use market movements, inconveniences, trends and inconsistencies to get its stocks. This is the function of fund managers. Other times the funds just use computers for this.
Global macro strategies
Global macro investing generates a risk adjusted return. By basing their strategies on the global markets hedge fund managers make their investments
Event driven strategies
Event driven strategies are applied largely during acquisitions, bankruptcies, liquidations and many other such scenarios
Relative value strategies
These take advantage of discrepancies in the price of securities. There are a number of ways that fund managers can apply this strategy to their advantage.
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Hedge Fund Association
Managed Funds Association