Hedge Fund | What Are Hedge Funds - And How It Benefits

Due to its exemption from the regulations that otherwise apply to mutual funds, brokerage firms or investment advisers, hedge funds are generally used to invest in more complex and risky funds than a regulated public fund. However, in recent years, hedge funds have been outperforming the stock market.

As its name suggests, the main function of a hedge fund is to offset any potential losses in the principal markets they invest in, using a variety of trading methods. The concept of a hedge fund originally started as a way to reduce risk. However, hedge funds have evolved to include funds high-risk investment with higher potential returns.

Hedge funds usually trade with property investment methods, and accessible only to certain accredited investors, are often secret to the general public. Because they are not regulated, are not required to disclose more details. Compared with public funds, reporting requirements are less strict.

For these reasons, hedge funds are commonly used by investors to access accredited business strategies and closed-end funds that otherwise would have been beyond the reach of the general public.

Accredited investors may choose to invest in hedge funds to:

1) reduce risk through the use of proprietary methods of trading in hedge funds, such as short selling.

In finance, short selling or "short" is the practice of selling a financial instrument that is not owned by the seller. This is done with the hope of gain if the price of a security, such as a stock or bond falls. Short selling is commonly used as a general term for all investment strategies that allow an investor to gain from a decrease in the price.

For example, in a bull market, the investor may decide to "go long", the purchase of an action in the hope that the price increase. However, to protect against a sudden market downturn, the investor may choose to participate in a calculated amount of short sales.

2) Provide a rate of return in an economic environment than other traditional investments in stocks and bonds can not reach.

In both cases, if there is an inverse risk-return. The aim is to tilt the balance of the existing portfolio so that financial goals can be achieved within a time frame expected.

Many sophisticated investors have come to recognize the benefits of hedge funds. These benefits are unique to hedge funds because of its flexible nature. In fact, many trading strategies used by hedge fund managers are unconventional and very sophisticated.

As is the nature of hedge funds to be quieter due to less stringent disclosure requirements, investors are advised to take a cautious approach when investing in hedge funds. Be sure to ask more about investment strategies that use of fund managers and assets in the funds are being negotiated