Hedge funds are investment firms that gather money to maximize returns deploying various trading and investing strategies. Hedge funds usually perform better in all kinds of markets than the conventional type of funds.
How hedge funds make money
Hedge fund portfolio consists of growth stocks, value stocks, short positions, ETFs, hedging positions, private equity funds, to maximize returns with or without mitigating risks. Hedge funds doesn’t always live up to their name because of the limitless appetite for returns. The goal of hedge funds is to actively search for bad news, overvalued stocks to initiate legit short positions and merger arbitrage to exploit price variations. Most of the return representations are made in monthly or quarterly basis because of the significance they make but annual returns may deviate from lame multiplication (12x, 4x).
Hedge fund strategies:
Alternative investments of this type take high risk and exploit inefficiencies to profit quickly and deliver huge returns. Some of the known strategies are:
- Event Driven strategies– Merger Arbitrage, Distressed/Restructuring of a firm, Being a shareholder Activist, Eccentic corporate actions.
- Relative value strategies– Security conversion (Convertible debentures to common shares).
- Macro Strategies– Economic changes, Business cycles, etc.
- Equity Hedge Fund strategies– Value selection, Growth selection, Shorting securities, usual Trading activities.
When hedge funds lose money
The firms do lose money when market or the security moves north, while the fund has entered with a short position. AMC and GameStop losses are well known to the investor’s community where young frenzy investors buzzed on their groups to fire the rocket. Deep pockets are cut when they fail to produce extraordinary returns to feed investors. Hedge fund managers themselves invest in the fund to build trust and profit from unusual performances.
Why hedge funds are bad
The delusion that prevails is Hedge funds are unethical and operate with no integrity which is completely unacceptable except reporting results. What Hedge funds are commonly registered as Limited Liability Partnerships. Asset under Management is the only reliable value with respect to hedge funds because of lack of regulation to present returns on a regular basis apart from the liable partners. Presented trading NAVs are adjusted for liquidity risk that deviate from accounting standards. Other than flexible operating, short selling is a way of strengthening market efficiency from the opposite side (preventing overvaluation).
Hedge funds vs Mutual funds
Even though they render the same service, they both are seen as rivalries. Hedge funds don’t have the obligation to register under SEBI. The main distinction between a traditional fund is hedge funds are lightly tightened that allows hedge funds to short securities and employ various trading strategies. Hedge fund managers have flexibility over the service charges from prime brokers who hold massive volumes of shares. Hedge funds can make you rich, but mutual funds are consistent compounders, though they under perform the benchmark index, the returns are risk adjusted or lesser than the hedge fund firms incur. Fortunately or Unfortunately hedge funds are not open to retail investors, the threshold is set on the investment amount and are subjected to highly illiquid, such that a ticket should be raised before 3 months of the remittance.
Hedge fund facts:
- Hedge fund industry is valued at $3.2 trillion, a 2018 report says.
- Bridge water associates is the largest hedge fund having $150bn invested.
- Renaissance Technologies cracked the market movements with complex mathematical models for 3 consecutive times delivering 69% annually.
- Hedge funds delivered 11%+ returns since 2010.
- 10,000 hedge funds operate actively all over the world.