We answer the questions you are too afraid to ask.
Of course we have all heard of a hedge fund, we probably know several people who work in that field, but what is it exactly? If you have always been too scared to actually ask, fear not as here is an easy-peasy explanation of one of businesses most used terms.
For us to understand what a hedge fund is, first we need to know where the name has come from. Hedging means to reduce risk, meaning that a hedge fund managers job is to find ways to increase your investment while reducing the risk of you losing your investment.
That’s not to say that a hedge fund manager doesn’t take risks when managing your account, but they will look for lower viewed risk options such as selling stock index futures, to increase your investment. Reducing risk while increasing profit is almost like walking a tightrope which is why, if hedge fund managers do well, they are can be some of the most highly paid managers around.
To put it in simple terms, a hedge fund is a pool of capital from multiple sources that uses a wide range of investment techniques in various fields to raise a greater return than capital given.
While there are various forms of hedge funds, many are set up to generate consistent levels of return, which is why investments into hedge funds are such a popular choice for people wanting to diversify their portfolios.
When it comes to timing of investment, hedge funds are always left open ended, allowing investors to increase or decrease capital at any given time with the value of an investor’s share in the fund being directly related to the fund net asset value. Throughout the fund’s life, the hedge fund manager, along with his support staff, will look to various areas and companies to invest capital and to increase value of the fund. The fund managers will also look to market the fund to other investors to broker deals for distribution.
There are three main types of hedge fund:
Open –ended which means a fund that continues to issue shares to new investors and that allows for withdrawals from the fund periodically.
Closed- ended which is the exact opposite of the above – a fund that issues a limited number of tradable shares from the beginning.
Listed hedge funds – a hedge fund where shares are traded on the stock exchange and so therefore non-accredited investors can buy into at any time.