subject: Hedge Funds [print this page] What is a hedge fund? Simply put, a hedge fund is an alternative investment platform which is able to offer a broader range of investment strategies when compared to other types of funds. Hedge funds are aggressively managed investment portfolios that offset a greater degree of risk on the investors' part with a greater potential for substantial returns against the initial capital investment. One would expect the term hedge fund to be applied to an investment strategy which offered lower risks and returns: to hedge an investment is to act in a way that minimises losses during a bear market. However, modern hedge funds are seen as a pro-active investment strategy and simply a way to diversify an investment portfolio. In this sense, the diversification acts as the hedge investment, even if the fund itself is offering a higher risk strategy.
Hedge fund managers offer bespoke investment strategies which exploit long, short, leveraged and derivative positions to deliver alpha investment returns that out-perform the overall performance of the market. The principle role of hedge funds is to out-perform other alternative investment platforms and strategies such as long-only managers. This is traditionally achieved by relying on qualitative assessments of the market and expert advice to make returns through a variety of channels. The market expertise that make this type of investment strategy are highly sought-after.
More recently, hedge funds have been able to exploit high end analytical computing technology. Known as quantitative investors, these funds utilise powerful computing programmes to cross-reference a huge database of market data to find investment patterns and automatically divulge strategies. Examples of modern quantitative traders include Robeco in the Netherlands and Blackrock Management in New York.
The size of hedge funds varies substantially. Existing US regulations state that the minimum capital worth of an investor in a hedge fund should be $1mn, whilst industry insiders suggest that as of 2012, a new hedge fund may realistically now require a starting capital of as much as $1bn to remain a viable entity in the US marketplace. Codes of conduct as well as large-scale initial capital investments allow hedge funds to remain stable.
Hedge funds have always fallen under some level of regulatory frameworks and, since the global markets' downturn began in September 2008, hedge funds have been faced with increasingly robust sets of guidelines and codes of best practices. Such policing of the industry is seen as a way to focus investment strategies towards long-term, sustainable growth, and to prevent the possibility of fraud occurring or positions of trust being exploited for personal gain. Hedge funds are established to cater for specific client needs, and they deal primarily with institutional investors such as pension fund managers and mutual fund managers.
The nature of hedge fund activity is one of innovation and constant re-evaluating of market conditions and investment patterns. Although regulation may be seen by some within the industry as an unnecessary or inconvenient obstacle for business strategies, the long-term objectives of growing confidence from investors, and earning a reputation for trustworthiness will see a net increase in the capital open to fund managers with a resultant growth of the industry as a whole.
