The nature of hedge funds is suitable for institutional investors and wealthy individuals. The general public cannot invest there as in a common mutual fund. Considered by some as responsible for the current financial crisis, and by others as formidable alternative management tools, hedge funds are becoming fascinating. For example, hedge funds have targeted individual publicly traded companies to take action to increase the value of the stock. For hedge funds, this is a way to increase the value of their holdings in these companies quickly.
Over the last few years, there has been an exponential growth in the assets managed by these investment vehicles. This growth in assets is due to both the performances generated by the funds and the increase in investor demand.
Hedge funds, use a variety of strategies such as short selling, which consists of leveraging the price decline of security, and arbitrage, which aims to take advantage of price differentials between different similar securities. The type of portfolio management used by hedge funds is often referred to as “alternative management.”
Expression commonly used to designate hedge funds, these funds to alternative management whose absolute performance is sought. Thus, hedge funds will not hesitate to invest heavily in a company to change the strategy. If the management nevertheless refuses to respond to requests from the hedge fund, the latter may sell all of its securities on the market in one block with the result that the stock market price collapses in a few hours.
What is a hedge fund?
The term hedge fund is commonly used to describe an alternative investment fund, that is, a fund whose strategy is not to invest in bonds, equities and money markets over the long term.
It is commonly used to describe an alternative investment fund, that is, a fund whose strategy or set of strategies is not to invest in long-term bonds, equities (mutual funds) and money markets (investment funds in money market instruments). Among these alternative strategies we find:
- Coverage by short selling — the sale of securities that one does not own by counting buying them at a later date at a lower price in the hope of lowering their price.
- Use of arbitrage — seek to exploit inefficiencies in pricing between related securities.
- Option or derivative transactions — contracts whose values are based on the performance of a financial asset, index or other investment.
- Use of debt — borrow to try to improve returns.
- Investment in undervalued securities that have fallen out of favor or are unrecognized (debt or equity)
- An attempt to take advantage of the gap between the current stock market price and the ultimate purchase price in situations influenced by events such as mergers or hostile takeovers.
The different strategies of the hedge funds vary enormously regarding:
- Investment returns
Some hedge funds, which do not correlate with equity markets, can offer consistent returns with extremely low risk of loss, while others may be at least as volatile as mutual funds (investment companies with variable capital).
Who can invest in hedge funds?
They are not intended for the general public. Companies like GFS Asia, offer quite a number of excellent financial-related services. The clients of these hedge funds are:
- Wealthy people;
- Financial Institutions;
- Pension funds.
Benefits of Hedge Funds
The main advantage of the hedge fund is its high profitability. Indeed, customers can be offered up to 25% yield per year.
- Fund managers invest their wealth. He is therefore associated with investors.
- It is an excellent tool for diversification.