Hedge funds have been in existence since nearly seven decades now, the very first one being launched way back in 1949 by A.W. Jones and Co. Since then, their popularity is ever increasing and now we have more than ten thousand of them existing in the markets.
Complex strategies and instruments
To start a hedge fund, a group of people comes together, raises money and invests in the markets to make a killing. Eventually, they open the fund to other interested but sophisticated individuals who wish to make profits through it. Rather than being an asset class, the funds are better described based on their structure. The fund managers make use of complex strategies and instruments to hedge the funds even when the market is on the downslide.
Gaining on mispricing
Initially, the funds used to get positive results going short, which means betting on falling prices or going long, that’s relying on the price rise. But now, most of the funds eschew hedge strategies to gain benefit from the small market mispricings. The strategy can really pay off well provided the bets are leveraged. Some funds increase their bets through the investments in hedge funds by borrowing money though the means of lending platform or asking the traders to invest in hedge coins. The strategy can be effectively employed for all types of markets, ranging from digital currencies to bonds, and equities to mergers and acquisitions.
Sophisticated techniques
Just like mutual funds, hedge fund managers invest in multiple securities and financial instruments like stocks, bonds and commodities. However, their investment techniques are more sophisticated and risky too. They allow exposure to the investors to some sophisticated financial instruments, such as options and derivatives.
Since they are being run and operated globally, their net financial worth currently is being estimated to be $3 trillion. Despite long into being operation, the funds enjoy considerable independency and privacy with little regulations from the Securities and Exchange Commission in the USA.
Hedging the risks
A hedge fund works on the premise of minimizing or hedging the risks for the investors in unpredictable financial markets, all the while maximizing the profits. There are the funds that buy the entire privately held businesses or take them over and then come up with initial coin offering (ICO) or initial public offering (IPO). Some specialize in lending platforms to provide cypto profits to the investors, while others specialize in real estate or trading the junk bonds.
Making profits in the risky financial environments
The funds typically make use of long-short strategy to meet their objective of making profits in the risky financial environments. While investing in a long strategy, the fund managers bet for the price to go up and in short strategy, they bet for the fall in the price. Moreover, while mutual funds typically invest in stocks and bonds, hedge funds can invest literally in anything, be it crypto currencies, HedgeConnect coin (https://www.hedgeconnect.co/), real estate, pensions, university endowments, etc.
Overcoming the misconception
There is misconception that these funds represent a monolithic industry. On the contrary, they are quite diverse. Currently, we have more than ten thousand funds representing different asset class, styles and amount of turnover. Some of them are more private; they don’t interact much with the broader investor community and usually keep a low profile. On the other hand, some are highly vocal, appearing on the television and magazines, influencing the investors participate in them.
To effectively run a fund, one needs to have real-life experience of how the markets turn. One needs to be apt at multiple skills. The fund manager should not only have analytical skills but also good communication skills to put their ideas across.