Key Characteristics of Hedge Funds
* Hedge funds utilize a variety of financial instruments to reduce risk, enhance returns and minimize the correlation with equity and bond markets. Many hedge funds are flexible in their investment options (can use short selling, leverage, derivatives such as puts, calls, options, futures, etc.).
* Hedge funds vary enormously in terms of investment returns, volatility and risk. Many, but not all, hedge fund strategies tend to hedge against downturns in the markets being traded.
* Many hedge funds have this ability to deliver non-market correlated returns.
* Many hedge funds have as an objective consistency of returns and capital preservation rather than magnitude of returns.
* Most hedge funds are managed by experienced investment professionals who are generally disciplined and diligent.
* Pension funds, endowments, insurance companies, private banks and high net worth individuals and families invest in hedge funds to minimize overall portfolio volatility and enhance returns.
* Most hedge fund managers are highly specialized and trade only within their area of expertise and competitive advantage.
* Hedge funds benefit by heavily weighting hedge fund managers’ remuneration towards performance incentives, thus attracting the best brains in the investment business. In addition, hedge fund managers usually have their own money invested in their fund.
Hedging Strategies
there is a wide range of hedginf strategies , some of them are listed below:
* 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