How Hedge Funds Work
Hedge funds are known as institutional investors. They, along with mutual funds, pension funds, insurance companies, commercial banks, and endowment funds, invest on behalf of other individuals/investors by buying and selling big chunks of debt and equity instruments. Here, you will learn about the history of hedge funds and its key features. What are the different types of hedge funds?
Key features of hedge funds
- Openness only to professional investors: they have to own at least 1 million dollars, excluding the value of their residence.
- Availability of different strategies: the choice of instruments is not limited by a hedge fund mandate. In fact, a hedge fund can invest in everything: land, real estate, stocks, derivative instruments, currencies, etc.
- Use of financial leverage: hedge funds often operate using borrowed money to maximize their earnings.
- Commission scheme: hedge funds charge investors not only with a fixed commission for managing their assets, but also percentage of profit. Usually, these commissions are 2% and 20% respectively.
A brief conclusion: hedge funds are not suitable for everyone. They have a lot of advantages in comparison with traditional investment funds, such as an opportunity to make money not only on growing markets, but falling as well. Portfolio balance helps reduce risks and volatility and increase profitability. Different investment approaches, which often don't correlate to each other, allows investors to make their investment strategies as accurate as possible. Hedge funds hire the world's most talented analysts, traders, and managers. Of course, there is no way round risks: a sector-specific investment strategy may result in huge losses.