A hedge fund is a common pooling process in which the individuals invest their money in different financial instruments. Not everyone can participate in hedge funding, only specific types of investors are allowed. These are the individuals who have a high net worth specified by the Securities Exchange Commission. They are more or less similar to mutual funds as multiple investors pool their resources in a single portfolio. However, hedge funds are more flexible as compared to mutual funds and they offer wide investment options such as taking the short positions, leveraging the positions, and side pocket investments.
The hedge fund managers earn their revenue through the management and performance fee. The management fee ranges between 1% and 4% per year whereas the performance fee ranges between 10% and 50% of the annual return. Most of the funds are operated through the high water mark rule according to which the performance is selected on the net profits after subtracting the losses from the previous years.
Hedge Fund Strategies
Below are some noteworthy hedge fund strategies.
- Aggressive Growth
In this strategy, the investment is made in equities according to the acceleration in the growth of the EPS. This strategy is used for sector specialist funds like banking, technology, biotechnology. The earnings disappointments are reduced by shorting stock indexes.
- Distressed Securities
As per this strategy, the trade, equity or debt claims of companies are bought on discount. These are usually those companies that are facing bankruptcy. As majority of the investors cannot own the securities that are below the investment grade, therefore, they are ready to accept the deep discount. They are not dependent on the market conditions.
- Emerging Markets
This is the strategy in which investment is made in the debt or equity of the emerging markets that have high inflation and their growth is volatile. These markets do not allow short selling.
- Fund of funds
Different strategies are blended for the hedge funds in different vehicles and assets for ensuring a stable long term return on investment. The risk and return can be controlled by mixing different strategies and funds. The volatility ranges from low to moderate.
If you are a newbie, it would be a bit difficult for you to understand hedge funding. A lot of tricks are involved and it is never easy to make a move according to the market situation. There are several factors which you have to consider before choosing the right fund. Have a look at some of them:
- Always make sure that the company you are planning to invest in is genuine. Check its registration with the Securities Exchange Commission.
- The company should be reliable and for that, you must check the database of its funds to find out its performance in the market.
- Talk to the hedge fund managers to learn about the type of services they can offer you. It is suggested to discuss the strategies that will be used in funding. This will let you whether the manager is knowledgeable about how funding works.
Role of a Hedge Fund Manager
Check out the hedge fund manager job description to find out more about its job duties and see how a manager can help you in hedged funding. The manager is the person who is responsible for creating an investment portfolio for you that will provide you guard against the loss. It won’t be a single type of investment in fact, the investment is going to be in different markets such as stocks, futures, bonds and even the unregistered security. Managing with a proper risk management strategy can be extremely lucrative.
As per the hedge fund manager job description, the primary task is to perform research analysis on the investment classes and the opportunities for identifying the best assets that can make up your hedge fund portfolio. They are the people who regularly meet with executives and clients who run the investment. If you are planning to invest in hedge funds, you must definitely meet with the manager.
You can greatly benefit from a hedge fund investment whether you are a manager or you are an investor. However, you will need the best business brains for this task to be sure you get a positive ROI.