What is a Hedge Fund?
Have you ever heard about hedge funds? Well, this is a term that is quite new and is getting popularity in the market. In the financial world, it is very common to use the terms ‘hedge fund’ and ‘fund’ interchangeably, but I will explain the difference between them here.
Hedge fund is a type of fund that is managed by investment professionals who are known as hedge fund managers. They invest in a variety of securities, including stocks, bonds, and currencies.
These fund managers use specific strategies to make money by predicting the market movements. These managers use their expertise to trade in the market and make a profit. These fund managers use various techniques like derivatives, options, and futures to make money.
So, let’s discuss in detail about hedge funds.
1. A hedge fund is a type of mutual fund that focuses on making money. The fund is managed by an experienced professional who makes the decisions regarding investments. The fund is not invested in any particular sector of the economy. The fund is a pooled investment vehicle and the pool of investments is managed by the fund manager.
2. The investment strategy of the fund is determined by the fund manager. The fund manager will use his/her expertise to predict the movement of the stock market. He/she will take a view on the movement and will try to make a profit.
3. The fund will use the latest technologies to predict the future. The fund manager will use data analytics to make predictions. If the market is trending, the fund manager will use technical analysis to make a trade.
4. The fund will be closed to the public, but the fund manager is allowed to invest in the fund. The fund is not open to the public and you need to be an investor to get in the fund.
5. The fund will be registered under the Investment Company Act of 1940.
6. Hedge funds are generally considered to be a high risk investment option, but it has a very high return rate. The risk is higher than other traditional mutual funds.
7. The fund is managed by a professional and he/she will make a profit in order to pay the returns to the investors.
8. Some of the hedge fund managers will use leverage to make money.
9. There are many types of hedge funds. You can choose from the following:
• Long only — The fund will invest in long-term securities. The fund manager will use his/her expertise to make a prediction of the market. If the market is moving in the right direction, then he/she will make a profit.
• Short only — The fund will invest in short-term securities. The fund manager will use his/her expertise to make a prediction of the market. If the market is moving in the wrong direction, then he/she will make a loss.
10. The fund is required to have a minimum amount of capital. The fund will also have a maximum amount of capital.