Before anything else, hedge funds are extremely complex and intricate investments that are not suitable for all investors. Although progress is being made from a monitoring point of view just to bring them on equal footing with several collective investment packages they are still way far behind on what is considered conventional.
In a lot of cases, hedging is removed as a typical alternative to conventional investment schemes mainly because the minimum amount to invest in these funds is too big. Yet, the essentials are still good to consider because regulating bodies are progressive in making some forms of hedge funds readily available to the novice trader, even calling a rather smaller hedge fund as “hedge fund lite” to draw in many investors.
Another ground why hedge funds are important is because of its strong correlation with provident funds and corporate pensions. These funds are given an additional allocation to optional investments including private equity. The implication is that any pension/provident funds may already be used as hedge funds in many cases.
Although investing in individual funds may seem impractical of you ask seasoned investors, there are a number of hedge fun-of-funds that investors could use to get a single point of entry to garner a sizable hedge fund. The portfolios are overseen by professional investors who put up different strategies across the industry to get investors psyched on how they can profit more out of their initial investment.
A recent hedge fund survey was done for the basic information on the accompanying chart to help give a broader perspective to hedging. The survey was able to break up funds into four different categories specifically; market neutral, fixed income, long/short equity and multi-strategy funds.
So far, the largest type is long/short equity which includes shares that are invested that are expected to go up (long) or down (short). The short position is greatly affected in two ways either by the use of selling shares or contract for difference to greatly benefit from a decline in their value. Going short is comparable to the dark art which generally rally against the market’s overriding inclination to rise.
It is essential to get it right the first time with the borrowed money because it is generally harder to have a strong conviction to become successful, especially knowing that the eventual end result is having a 100 % return. Still whatever the case may be going, short and the use of leverage are the hallmarks of hedging.