How Do Hedge Funds Operate?
by Harry Shawn An Apt Solution for Online PresenceWhat Is A Hedge Fund?
A hedge fund is a kind of investment
vehicle where a professional management firm pools money from the investors and
reinvests the money in a wide variety of markets using different investment
styles and financial equipments. Unlike Mutual Funds, Hedge Funds are not
regulated by the Securities and Exchange Commission. This, along with many
other factors, makes the Hedge Funds quite a risky venture, but then, this risk
is actually the biggest attraction as the investors believe “higher risks means
higher rewards”.
How Do Hedge Funds Work
There is no specific way in which
hedge funds operate. Different hedge funds employ different strategies and it
all begins with a hedge fund manager who comes up with a specific investment
strategy. He then finds certified investors and clients to pool their money and
invest it in the market to gain profit. Hedge funds employ a wide variety of
trading strategies and classifying them often becomes difficult as they keep
changing and evolving very frequently. However, there are four main categories:
·
Global Macro
·
Relative value Strategy
·
Event-Driven
Strategy
·
Directional Or
Tactical Strategy
Global Macro Hedge Fund
Unlike the conventional approach,
where the investment decisions are based on the micro events like completion,
strategy, quality of the management team, market share, profits and P/E ratio,
the Global Macro is an approach where the investments are based on the macro
events, i.e. the global economic scenario. Here, the money is pooled with the
expectation of a global macro-economic event so as to generate a risk-adjusted
return. The managers study the global market events and trends and look for
lucrative opportunities for investments.
Relative Value Hedge Fund
The Relative Value strategy is the
approach where the investment is based on the relative price discrepancies
between individual securities rather than depending on the bigger changes
within a specific market. Using technical, mathematical or fundamental
techniques, the managers identify the price discrepancies in the securities. Then
they select and invest in the comparatively undervalued individual securities
and take short positions on securities considered overvalued. This strategy
involves less risk and is favorable for low volatility markets.
Event-Driven
Hedge Fund
In the event-driven strategy, the hedge fund managers strive to
earn profits from corporate events like merger and acquisitions, spin-offs,
reorganizations and bankruptcies. The profit is based on the correct
anticipation of the resolution to a corporate event. Compared to the
traditional equity investors, the hedge funds are more likely to pursue
event-driven strategy as they are better equipped with resources to evaluate
the corporate transactional events and identify a lucrative investment
opportunity.
Directional
Hedge Fund
Directional or tactical hedge fund strategy is quite common and it
involves the analysis of market conditions, market trends and the fluctuations
while pricing stocks across a variety of markets. Based on all these market
conditions, the hedge fund managers identify the right investment
opportunities. This hedge fund strategy is often exposed to market fluctuations
and involves international long/short equity hedge funds. There are many other
sub-strategies that work under this strategy like the Emerging Market Funds and
Sector funds.
Conclusion
Among all these strategies, the one common factor is the presence
of the hedge fund manager who identifies and selects the investment
opportunities and whatever is his strategy, the investors and clients have the
faith that it will work and bring them a good ROI (return on investment). When
the time comes to close the fund, the assets are either distributed among the
investors or transferred into a new fund initiated by the same company.
However, in case a fund is closed due to performance failure (this is the last
possible option), the manager holds the investor redemptions so as to bring
some relief to the investors when liquidity is not available.
To know more about hedge funds or other investment vehicles, feel free to visit our website at http://mergeralpha.com/
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Created on Dec 31st 1969 18:00. Viewed 0 times.
Thanks for the great share.
Jun 12th 2014 09:07 1 Likes