Types of Hedge Funds
Main Types of Hedge Funds
Being an investment vehicle that works by pooling investments from several entities and investing the total to other markets, hedge funds can come in different forms and strategies. Although each type is different with each other in some specific ways, it is essentially the same in the sense that they aim to achieve a positive return on investment for the investors. Lets look at some types of hedge funds.
This type of hedge fund is somewhat similar to mutual funds in that it simulates some of the strategies employed by the latter vehicle of investment. However, long-short funds are different in terms of the ways by which it makes sure that a positive return on investment is achieved. It utilizes derivatives, advantages, leverage and short positions, making it a competitive type despite the situation in the market. The amount of these may be regulated by the law and are usually invested in stocks.
This particular hedge fund is inclined to sit on the more complex side as compared to the first one. It is more aggressive in the sense that it balances the use of stronger and more confident stock choices with bearish ones. It is also able to gain income with the use of proceeds from interests on sales of short securities. This type aims to come up with consistent returns that are above the T-bill rate. Although this could result to greater rewards given the fair weather in the investing industry, it is not suitable for novices and conservative investors.
Event Driven Funds
The strategy of taking advantage of changes in stock prices during certain events in a company is what defines this particular type of hedge fund. From the name itself, this event-driven strategy makes use of the fluctuations in the prices of stocks in unpredictable events such merging, natural disasters, major political troubles and restructuring in a certain firm or company. Before an investment is made on these newly priced stocks, strategists usually make a thorough study of the company and its value beforehand. After the stocks are acquired, it is retained and sold only after the prices are stabilized again.
In a nutshell, macro funds are basically a strategy in hedging that uses directional wagers on the general market, either in the form of a long or short positions, currency and future markets, and uses the principles and the philosophy of the fund as a basis. Since this practice usually involves investments done on foreign stocks, currencies, and whatnot, it requires a thorough knowledge of a particular country’s economic principles and views in order for a strategist to make a prudent decision on selling or buying stocks. Trends on the rise and fall of the country’s economy are one of the factors in making a decision using this strategy. These are the main types of hedge funds and the strategies they employ with which to attempt market gain.