Hedge funds are investment portfolios managed by investors or companies, using various strategies to balance trades and make profits. They are mostly unregulated and have evolved to include options trading, undervalued securities, and risk arbitrage. Hedge funds are only available to accredited investors and qualified buyers, and are often run by offshore companies to maintain secrecy. As of January 2011, about $1.9 trillion worth of assets were under hedge fund management.
A hedge fund is a type of investment portfolio that incorporates a variety of investment products and strategies. The fund may be managed by the investor who created it, or it may be created in the form of a company, such as a Limited Liability Company (LLC). This last option creates a protection in case of bankruptcy of a company; creditors cannot go after investors for more money than they put into the fund. Investors will put money into the fund and the manager will receive a share of the profits the fund makes; Earnings in a hedge fund depend on choosing the right stocks and acting on them at the most opportune time.
The term hedge fund comes from the phrase “hedging the bets,” and refers to the practice of balancing trades to ensure that no matter which way the market turns, profits can still be made. These break-even trades are what distinguish hedge funds from a host of other fund strategies that emerged at the turn of the 21st century.
Evolution of hedge funds
The first hedge fund was created in 1949 by stock pioneer Alfred Winslow Jones. Originally, the hedge fund was essentially meant to be a fund that sold some stocks short and bought other stocks long. Buying stocks short involves selling borrowed shares in the hope of buying them back at a lower price, while buying stocks long means buying stocks that are expected to rise in value and selling them once they do. With this technique, the overall value of buying and selling is balanced, thus eliminating large losses due to large market swings. For the most part, the term hedge fund now refers to any fund that is mostly unregulated and employs unconventional methods of investment, with most hedge funds having partnership status, rather than the corporate model. from other funds.
investment strategies
Hedge funds have evolved to include a number of strategies, in addition to Alfred Jones’ balanced long-short strategy. Some common hedge fund strategies include: trading stock and bond options, buying or selling highly undervalued securities, and arbitrage. Another common strategy is called risk arbitrage and involves buying shares in a company that is in the middle of a merger and acquisition; in this case, there is a guaranteed profit if the merger is completed, with the only risk that the acquisition will fail.
regulations
To keep regulation very low, hedge funds have the status of unregistered investment companies. This means that only accredited investors and qualified buyers can invest in them: those who have income of more than $200,000 USD per year, a net worth of more than $1 million USD, or those who already have at least $5 Millions of dollars in investments.
Unlike mutual funds, hedge funds are very lightly regulated; As a result, they are able to keep their actions relatively secret. Most contemporary hedge funds are run by offshore companies in places like the Virgin Islands or the Cayman Islands, where regulation is minimal. This secrecy makes it hard to predict the actual numbers for hedge funds, but as of January 2011, about $1.9 trillion worth of assets were under hedge fund management.
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