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How Do Hedge Funds Operate?

by Harry Shawn An Apt Solution for Online Presence


Huge funds

What 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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About Harry Shawn Committed   An Apt Solution for Online Presence

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Joined APSense since, March 21st, 2013, From Ottawa, Canada.

Created on Dec 31st 1969 18:00. Viewed 0 times.

Comments

Mike G. Professional   Marketer
Thanks for the great share.
Jun 12th 2014 09:07   
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