myz-vgb.ru A Business Encyclopedia

Hedge Funds

Definition: The Hedge Funds are the investment funds that pool the resources of wealthy investors to reinvest these into an array of complicated financial instruments, using the wide range of investment techniques to generate higher returns for a given level of risk.

The term “hedge” is derived from the word “hedging” which means “to reduce risk”. Therefore, the primary objective of the hedge funds is to outperform the market and generate high returns irrespective of what the market does.

Key features of Hedge Funds that make them unique from other investment vehicles are:

  1. Only the accredited investors who meet the certain net worth can invest in these funds. Often, the investments are made by the significant and wealthy investors.
  2. The fund manager focuses on absolute returns rather than the returns relative to the index, thereby offering the investors to earn even if the traditional markets are observing the downfall.
  3. Unlike mutual funds, the hedge funds can invest in anything, such as real estate, land, stock, currencies, and derivatives while the former can invest only in stocks or bonds. Thus, hedge funds have a wider array of securities.
  4. The hedge funds charge not only the expense ratio (a cost to operate a mutual fund) but also charges the performance fee. This fee structure is called as Two and Twenty, i.e. 2% asset management fee and 20% of gains generated.

The fundamental belief among the investors is that there is a direct relationship between the risk and return, i.e. the returns would be higher for those funds which are riskier; then how the hedge funds contradict this connotation?

Well, the fund manager looks for varied ways to get rid of the risks and, therefore, make use of several derivatives and leverages the price differentials in both the domestic and international markets with the intent to generate higher returns for the investors. Also, he tries to reduce the correlation between the hedge funds and equity or bond markets.

Leave a Reply

Your email address will not be published. Required fields are marked *

Shares

Related pages


linear programming minimization problemdefine divestjaharis windowqueues meaningmeaning of piece ratedeontological definition examplesimplex method lppbalanced scorecard dimensionsmax weber on bureaucracytypes of training in hrmsampling distribution of proportionhrm planning processteological ethicssupervisor means in hindisenior citizen saving scheme interest rateretrenched definitioncharacteristic of oligopolistic marketdefinition of payedwhat is itr 1 in income taxmnc meansexplain elasticity of demandvestibule training definitionmarginal costingdefine expansionismrecruit defwhat is meant by debenturedefine vamlaissez faire leadershipcomponents of compensation managementmodified irrexplain elastic demandmeaning of regression in hindiexplain the trait theory of personalityconglomerate diversification definitiondefinition of ojtwhat is a profitability indexwhat are the components of a modern marketing information systemneoclassical organization theoryabout henri fayolsimulation meaning in tamilscatter chart definitionweber and bureaucracypaired comparison method of performance appraisalwhat is diminishing marginal utility in economicsspearmans correlation coefficientteleological ethical theory definitionmarketing promotional mixcompany provident fundmeaning of cross elasticity of demandmeaning of chequeswhat are formal and informal groupsdisclosed factoringexample of id ego superegokarl pearson coefficient of correlation pdftypes of informal communication in organizationsan ethnocentric staffing policyfactors affecting promotion mixequity linked savings schemesstructural unemplymentfactors influencing price elasticity of demandneft settlement timingsconglomerate merger definitionpropinquity meanswhat is the difference between strata and stratummeaning of autocracywhat is the meaning of divestmicr cheque meaningsbu strategiesconflict mgtcarrot stick methodnonbank financial companydifference between demat account and trading accountsemantic differential scale samplepurpose of a cash budget