What Are Hedge Funds And Are They Risky?

Investing in a Hedge Fund is an ideal opportunity to access to a huge range of fund strategies

, managed by many of the world's top investment professionals, for a relatively modest outlay on behalf of the investor.

So what is a hedge fund? Well, it is a fund that can buy and sell undervalued securities, can take both long and short positions, use arbitrage, trade options or bonds, and invest in almost any opportunity in any market where it foresees significant gains at reduced risk. Strategies for manageing hedge funds vary enormously. For instance, many fund managers hedge against downturns in the markets which is vitally important with volatility and anticipation of corrections in overheated stock markets these days. The primary aim of most hedge funds is to reduce volatility and risk while attempting to preserve capital and deliver positive returns under all market conditions.

All hedge funds are not the same so it is vital to understand the difference between the various hedge fund strategies because investment returns and risk vary enormously among the different strategies. For instance, some funds which are not correlated to equity markets are able to deliver consistent returns with extremely low risk of loss, while others may be just as or even more volatile than mutual funds.

A successful fund of funds will understand and manage these differences and use various strategies together to create more stable long-term investment returns than any of the individual funds.

It's a popular belief that all hedge funds are volatile and that they all use global macro strategies and place large directional bets on stocks, currencies, bonds, commodities, and gold, while using lots of leverage. However, in reality, less than 5% of hedge funds are global macro funds. Most hedge funds use derivatives only for hedging or don't use derivatives at all, and many use no leverage.

So why choose a hedge fund to invest in? Well, it allows for easier administration of widely diversified investments across a large variety of funds and also eliminates the need for time-consuming due diligence otherwise required for making singular fund investment decisions.

by: Thomas Standing

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