How is a Hedge Fund Beneficial?

In this article, we wanted to provide an overview of how a hedge fund would be beneficial to you.  Before we get into the benefits, we want to provide a brief overview of what a hedge fund is.  In simple terms, a hedge fund is an investment fund that is lightly regulated.  This type of investment can take both a short and long-term position, buy, as well as sell undervalued securities, trade bonds or options, use arbitrage, and invest in virtually any market opportunity where impressive gains would be possible at low risk.

In this article, we wanted to provide an overview of how a hedge fund would be beneficial to you.  Before we get into the benefits, we want to provide a brief overview of what a hedge fund is.  In simple terms, a hedge fund is an investment fund that is lightly regulated.  This type of investment can take both a short and long-term position, buy, as well as sell undervalued securities, trade bonds or options, use arbitrage, and invest in virtually any market opportunity where impressive gains would be possible at low risk.

Many people like investing in hedge funds because economically, strategies vary.  One advantage is that people can hedge against market downturns, which is especially important in today’s world where overheated stock markets are volatile.  Although there are approximately 14 unique hedge funds options depending on the goal, used to reduce this volatility and risk, but also help preserve capital, as well as produce positive returns regardless of the current market condition.

A couple examples include the macro hedge fund and the equity hedge fund.  With a macro hedge fund, investment is in stocks and bonds, as well as other investment options.  While this type of hedge fund is more volatile, it also provides the opportunity to grow faster than using a distressed securities fund.  For the equity hedge fund, the investment could be nationally or internationally, which involves hedging against downturns specific to the equity market by shorting stock indexes or overvalued stocks.

By understanding the various components and characteristics of the various hedge fund strategies would make it possible to choose the strategy that would work best for your ultimate goal.  Keep in mind that while information has circulated that all hedge funds are volatile this is untrue.  Most funds use derivates just for hedging or do not use derivatives at all.  In fact, some hedge funds do not even use leverage.  Although the benefits of a hedge fund depend on the actual type, we wanted to provide some examples of how an investment of this type could be advantageous over other investment types.

•    Most strategies can generate positive returns regardless whether equity and bond markets are rising or falling
•    Maintaining hedge funds in a balanced portfolio reduces risk and vitality while increasing returns
•    Multiple investment options with many being uncorrelated to one another, which means a wider range of hedge fund strategies to meet or surpass investment goals
•    Perfect long-term investment solution, which eliminates the need to correctly exit from markets and time entry
•    Using academic research, this investment can produce much higher returns while lowering overall risk over other investment funds
•    Provides diversification that would otherwise not be available with traditional investment options
•    Delivers more stable returns due to fund-of-fund manager’s ability, as well as insight into the various strategies
•    Reduces both individual fund and manager risk significantly
•    Eliminates time-consuming due diligence
•    Makes administration of widely diversified investments across multiple hedge fund strategies easier

As you can see, hedge funds provide a number of benefits over other investments.  One benefit that attracts investors more is the opportunity for aggressive growth.  In addition, hedge funds are distressed securities so profit is possible regardless of the direction of markets.  Keep in mind that as with any investment, especially in a tough economy, risks exist.  For this reason, it is imperative to learn all you can about the benefits, but also any risks.  That way, you can choose the strategy right for you so the benefits are more than you ever expected.