Investing in Hedge Funds – Using Strategy to Protect Against Loss

The first hedge fund is thought to be brainchild of Alfred W. Jones. He created it in 1949 with the idea that the loss risk incurred with the short selling of some stocks could be hedged by holding other stocks longer, relying on the tendency of the market to average around ten percent each year. This structure is a managed fund. The fund manager opens the funding opportunity to a limited clientele of investors, normally wealthy ones with quite a bit of capital. Pooling these billions of dollars opens up investment opportunities that are unavailable to ordinary investors. Investing in these funds can provide potentially huge profits.

In order to encourage proper management of investing in hedge funds, there are normally performance fees in addition to a management fee. These fees are typically calculated as percentages. The management fee is a percentage of the net asset value of the fund each year. The performance fee is a percentage of the fund’s profits each year. The management fee is designed to provide for operating costs. The industry standard is two percent, but it can range from one to four percent of the net asset value of the fund. A performance fee can also be called an incentive fee. The normal percentage of the fund’s profits is around twenty percent, but some fund companies charge up to fifty percent in incentive or performance fees.

Trading strategies vary from manager to manager of each fund. There are numerous methods that this type of fund managers employ in an attempt to get the highest returns on their investors’ capital. Investing in these funds is made easier by the fact that hedge fund companies tend to specialize in a specific strategy, as well as a type of investment. Possible styles include event-driven, managed futures (CTA), global macro, relative value (arbitrage), and directional.

Some managers select the investments individually, while other investment choices are made by a computer system. An individual selection management style is called discretionary/qualitative. A computerized decision making process is called systematic/quantitative. Hedge funds may focus on a certain sector of the market, like technology, healthcare, energy, emerging market, etc. When choosing a hedge fund, investors consider the sector of the market, investments approaches, history of performance by the manager, and more. Investing in these funds is over five hundred billion dollars of the market share in the United States.

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