Hedge Funds

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A hedge fund is a type of investment fund that is actively managed by a private party. Hedge funds are a source of investment for various markets, instruments, and strategies. They fall under the jurisdiction and regulations of the country that they belong to. One unique characteristic about hedge funds is that they are open-ended. This means that investors are allowed to add or remove funds at any time. The value of a hedge fund is calculated as a part of the net asset value of the fund. This means that the fluctuations in the fund’s value are representative of how much the investor can withdraw at a given date. The overarching aim of a hedge fund is to increase the likelihood of getting a good return on the investment, independent of market increases or decreases. This makes them a very profitable undertaking for hedge fund managers, who often manage their own money this way.

Strategies

When it comes to hedge funds, there are a number of different strategies for traders. However, it is difficult to try to put them into categories as they are always changing and evolving as the market changes. In general, they can be classified into four groups: global macro, relative value or arbitrage, directional, and event-driven. The global macro strategy is the undertaking of a sizable position in a share. This strategy is usually employed in order to anticipate worldwide changes in the market, also known as macroeconomic events. Global market trends are analyzed and predictions are made in order to make this a profitable strategy for investing money.

An arbitrage hedge fund investment relies on differences in price between certain securities. This difference might be due to a mistake in pricing or it might be the result of an insecure market. The difference can be determined by various analysis techniques, including fundamental, technical, and mathematical.

A directional strategy for investing in a hedge fund incorporates stocks from a wide range of markets. It analyzes trends in the market and movements or discrepancies that might lead to profitable investments. Unfortunately, this also exposes directional investment strategies to market vulnerability.

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Finally, an event-driven investment is related to an occurrence that comes along with a particular opportunity for investment. It can occur as the result of a large corporate transaction, such as a bankruptcy, liquidation, recapitalization, consolidation, or acquisition.

There are firms dedicated to managing hedge fund investment. They charge fees for their services, which include the both management and performance of the investment. These fees are usually calculated based on the net value of the assets in the fund. They can range anywhere from one to four percent per year but in general, the rate is two percent. This amount, although it is expressed as a yearly percentage, is usually paid out on a quarterly or even monthly basis.

The performance fee is based on the profits of the hedge fund and can range anywhere from 10 to 50 percent of the money the fund generates in a year. This fee acts as the incentive for the managing firm to help the fund become a more profitable investment. One major criticism of this practice is that the manager doesn’t suffer when the fund endures a loss. Therefore, there is a tendency for managers to downplay the risk involved in a particular investment.

Structure

Hedge funds are run as either partnerships or corporations. The manager in charge of the fund is usually a member of a company responsible for managing numerous other hedge funds or assets. This company is distinct from the hedge fund source and the two are not legally connected other than through the business partnership. Other parties or companies may also be accessed for support in managing the fund. These include accounting firms, administrators, prime brokers, and distributors who provide various services.

These parties have various functions in terms of the structure of the fund. The prime brokers are usually affiliated with banks and have the role of financing the fund in the short term or providing leverage. Administrators might see provide support for the fund in terms of accounting, valuation, or operations. Distributors attract new investors and send out the securities attached to the fund. Finally, accounting firms are usually hired to complete tax requirements. All of these extra parties, when part of a hedge fund, enable the manager to focus on the priority of investing the money to make a profit.