Are you invested in a Hedge Fund? Do you know what it is?

By Jason Fittler

A Hedge Fund is a fund that can take both long and short positions, use arbitrage, buy and sell undervalued securities, trade options or bonds, and invest in almost any opportunity in any market where it foresees impressive gains at reduced risk. Hedge Fund strategies vary enormously -- many hedge against downturns in the markets -- especially important today with volatility and anticipation of corrections in overheated stock markets. The primary aim of most hedge funds is to reduce volatility and risk while attempting to preserve capital and deliver positive returns under all market conditions.

A wide range of hedging strategies are available to hedge funds. For example:

Selling Short - selling shares without owning them, hoping to buy them back at a future date at a lower price in the expectation that their price will drop.

Using Arbitrage - seeking to exploit pricing inefficiencies between related securities - for example, can be long convertible bonds and short the underlying issuers equity.

Trading Options or Derivatives - contracts whose values are based on the performance of any underlying financial asset, index or other investment.

Investing in anticipation of a specific event - merger transaction, hostile takeover, spin-off, exiting of bankruptcy proceedings, etc.

Investing in deeply discounted securities - of companies about to enter or exit financial distress or bankruptcy, often below liquidation value.

Many of the strategies used by hedge funds benefit from being non-correlated to the direction of equity markets

Benefits of a Hedge Fund of Funds:-
  • Provides an investment portfolio with lower levels of risk and can deliver returns uncorrelated with the performance of the stock market.
  • Delivers more stable returns under most market conditions due to the fund-of-fund manager’s ability and understanding of the various hedge strategies.
  • Significantly reduces individual fund and manager risk.
  • Eliminates the need for time-consuming due diligence otherwise required for making hedge fund investment decisions.
  • Allows for easier administration of widely diversified investments across a large variety of hedge funds.
  • Allows access to a broader spectrum of leading hedge funds that may otherwise be unavailable due to high minimum investment requirements.
  • Is an ideal way to gain access to a wide variety of hedge fund strategies, managed by many of the world’s premier investment professionals, for a relatively modest investment.
Hedge funds are another way of diversifying your portfolio, recently there has been a lot of bad press about these funds. Fundamentally these are solid investments which you should have some exposure to.