Brief Information about Hedge Funds

Hedge funds refer to professional investment companies that undertake to provide higher returns than those provided by the market through the use of such tactics as the leverage, short selling, and arbitrage. Investing in hedge funds is rather differs from investing in mutual funds since hedge funds are less regulated; thus, they are normally attracted by accredited investors.

What Are Hedge Funds?

Hedge funds are professionally managed investment companies that collect money from accredited investors and employ several different techniques to achieve chronically superior rates of return. Again, while mutual funds are tradable to the general public, hedge funds on the other hand are usually limited to qualified purchasers commonly known as accredited investors. This characteristic also means that hedge funds can work with more looseness compared to various other types of funds since they are able to make usage of high risk techniques.

Thus, the hedge funds actively participate in the determined financial market and would go a long way to impact on the total financial market of the country.

There are various contributions involved with hedge funds, and they serve an important function in the global financial markets; for instance, liquidity providers, better price discovery process, sometimes even stabilizers. But at the same time they have a number of risks, or better to say controversies.

1. Liquidity Providers

The facts are that hedge funds may trade with considerable volumes, thus acting as market makers. It may also assist in lowering the transaction costs for the other investors it interacts with and stabilize prices. Nevertheless they also potentially turn into sources of fire sales during episodes of market stress, if they are compelled to liquidate their positions quickly.

2. Price Discovery

Since hedge funds take positions according to their fundamental approach to the markets, they help in the determination of market prices. They assist in maintaining the correcting of the asset prices to the current state of the economy. For instance, there is a situation when hedge fund recognized that certain stock is undervalued, thereby its purchases influence the movement of the stock price to its real value level.

3. Market Stabilization

Hedge funds in certain cases may provide some form of balance to the markets by going against the direction that is probably been heavily speculated on. For example, where numerous investors are selling an asset, a hedge fund may effect the purchase of the asset, to counter extend huge losses through falling prices. However, this role comes with risks particularly because hedge funds can also create noises with leveraged positions.

Benefits of Hedge Funds:

High Potential Returns: Employ high-risk and comparatively high-reward practices like leverage, arbitrage and the use of the long/short equity.

Diversification: Meet the need of investors by offering more opportunities and risk management, thus increasing diversification of portfolios.

Absolute Returns: Emphasize the returns that can be generated for them and their shareholders no matter what happens to the rest of the market.

Expert Management: Professional people, who use high levels of research skills and market analytics to run the portfolio.

Investopedia

Investopedia offers long-form articles, comprehensive guides, and professional’s views on Hedge funds, including all the fundamental and even some of the advanced ideas about it.

Hedgemyfunds

Detailed examination and ranking along with other critical data about hedge fund’s performance aids in decision making while choosing appropriate funds for an investor.

Cited hedge fund data from Hedge Fund Research, Inc. or HFR Database.

These provide special research reports pertaining to the industry and performance indices of hedge funds that prove highly beneficial for investors.

The following sources of information will contribute to enhancing your knowledge of hedge funds and their operations and the possible effects of their activities on the portfolio.