Hedge funds are alternative forms of investment. Unlike most other investment managers, hedge funds are flexible in the choice of strategies and investment instruments they use. They can buy and sell derivatives, open “short” positions and use borrowed funds to finance operations.
For the investors, the main advantage of hedge funds is their focus on absolute return unlike traditional asset management firms, where the emphasis is on relative returns versus a benchmark. A true hedge fund is an investment tool that makes the consistency and stability of profits a priority.
Hedge funds are the most dynamic sector of the investment world. Currently, there are about 12,000 hedge funds, asset managers, totaling more than $ 2 trillion. Accounting for 10% of all the money in the world.
Hedge funds are often referred to as “insurance against markets” as the asset management of most funds is based on market neutral strategies. Such strategies are based on the relative growth of the securities. For example, they buy a company’s shares, which are considered undervalued, and at the same time sell to “short” the stock of overvalued companies in the same sector.
Other strategies of hedge funds involve the use of futures, options and other derivative financial instruments. Such funds are not usually used as instruments to reduce risk, but instead usually represent the more volatile investment strategies.
To reduce systemic market risk and access successful hedge fund strategies along with other alternative investment vehicles you can use a fund of funds. It simplifies the process of choosing a best fund by mixing together funds to achieve an investor’s’ goals in terms of risk/return and to spread the risk among multiple funds. This mixture of different strategies and goals earn revenue on a more consistent basis than any other individual fund.