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Understanding The Concept Of Hedge Fund And How It Functions



In the past couple of years, using hedge funds in private financial dealings has been on a steady rise. Simply put, a hedge fund is an investment deal between an investor and an authorized fund manager; they pool their funds together to make concerted investments with it.


It is very important that an intending hedge fund investor gets a good understanding of how hedge funds generate revenue and also know the amount of risks they participate in when they decide to key into this type of financial dealing. This article aims to elucidate all one requires to fully understand the rudiments of hedge fund. 


Understand What A Hedge Fund Actually Is

Hedge funds are private organizations that collect money from different willing investors and reinvest such funds in more sophisticated financial dealings. It is expected that a hedge fund company should be able to generate increased revenue irrespective of whatever happens in the financial market.

It is advisable that before one goes into a hedge fund deal, one should have the requisite experience to protect oneself from undue financial losses.  As a rule, the general public cannot provide capital to a hedge for its operations. However, their is no limitation to what a hedge fund can invest in.


Understanding The Functioning Of Hedge Fund

If you decide to make concerted investments with other investors, then an independent body is required that can effectively pool together the capitals from each party. Different kinds of investment dealings are very much possible depending on what this funds pool body decides to invest in and which investors are allowed to participate in them. Most hedge investors are very rich and can easily absorb the consequences of losing one's total capital on such partnerships.


Hedge fund setups are usually coordinated by the Hedge Fund Manager who is charged with making the correct investment decisions on behalf of the hedge fund. A frequent practice is to make the hedge fund manager the highest investor in the pool so as to make them more prudent while making the necessary investment dealings.


Common Hedge Fund Practices


The Global Macro Way - This offers much more diversity. One can decide to invest in commodities, stocks, currencies or bonds. Irrespective of the type of investment tool being employed, the basic idea is to make macroeconomic stakes and be on the lookout for global openings.


Long/Short Equity Hedge Fund - In this practice, one can decide to purchase stocks of companies that are forecasted to perform better while selling off short stocks that have been forecasted to perform poorly. A well detailed company research and stock selecting are important to continued success of this hedge fund practice. 


Market Neutral Hedge Fund - This bears quite a resemblance to long/short equity. The aim is to generate revenue that is not dependent on how the market performs. The goal of market neutral, just like the name implies, is to successfully neutralize the effects of market uncertainties. 


The Event-driven Way - In this hedge fund practice, the plan is to purchase the debts of companies with considerable financial issues or those of companies who have already declared bankruptcy. 


The Fixed Income Arbitrage - This hedge fund practice takes maximum advantage of price disparities between two fixed income securities. Such securities may include credit default swaps, corporate bonds, treasuries and municipal bonds.

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