You dont have to manage a multi-billion dollar fund to be a part of this community! Our various articles,breaking news, andFAQsare for everyone and anyone who has an interest in the world of hedge fund investment. Our contributors include brokers, analysts,fund managers, financial writers, and hedge fund enthusiasts. It is our goal to educate both beginners and seasoned pros alike, while dispelling common myths about this often misunderstood industry.
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Hedge funds have been proven to correlate very little to traditional asset classes. In other words, when the stock market drops 10%, it is not at all necessary that hedge funds will lose as much, or even decline at all. Thus, a portfolio that includes hedge funds or any asset class whose returns depend less on the market, will benefit greatly from the added diversification.
The original purpose of hedge funds is capital preservation. Hedge fund managers have a number of risk management tools at their disposal that could help reduce downside risk. This enables them to deliver consistent returns in all market conditions.
Hedge fund managers also employ investment tools that can greatly increase returns. Unlike mutual funds, hedge funds can use short selling, invest in derivatives, leverage their portfolios, and hold highly concentrated positions – strategies that can amplify returns greatly. In fact, composite hedge fund indexes have consistently equaled or beat the aggregate market indexes (such as DJIA and Russell 2000) in the last five years.
The fact that hedge funds can provide high returns at lower risk is not a contradiction. In general, hedge funds offer higher risk adjusted returns than traditional investments. Pooling hedge funds into portfolios can significantly reduce total risk as exemplified by the hedge fund indexes. More importantly, the addition of one or more well-chosen hedge funds to an investment portfolio can add the same benefits to an investors overall financial picture.
Hedge funds have been a mystery to some and thought of as an investment device for the Rich and Famous. Aside from the exclusivity they have enjoyed, hedge funds are in fact the choice of many informed investors.
What makes hedge funds different, and thus the key to their unique ability to succeed, is their diversity. The variety of hedge fund strategies far exceeds anything offered by a traditional mutual fund or stock broker. The strategies tend to be more niche-like in their approach and frequently, much less dependent upon the market for returns.
Investors also prefer to invest in Hedge Funds because the fund managers have a direct interest in the positive performance of their funds. Hedge fund managers are compensated largely based upon how well they perform, and in many cases, the fund manager is also one of the key investors in the fund. These are two very strong incentives for the fund managers and possibly why many hedge funds will achieve their goals while other investment vehicles may not.
However, since the strategies and manager incentives vary so widely, it is important to take the time to evaluate hedge funds and find one that matches your objectives with a strategy and manager you believe in.
If you are interested in learning more about hedge funds and their origins be sure to check out our interactive Question and Answer section.