Similar to mutual fund investments, investors of hedge funds place their funds into a portfolio of certain holdings that experienced investment professionals manage. Essentially, hedge funds are developed to obtain positive return rates on the principal through the use of sophisticated and often aggressive trading approaches instead of merely investing in bonds or stocks from publicly traded companies.
Hedge funds come in various types, with the following being the most popular:
Long Short Hedge Funds
This involves purchasing and selling stocks to outperform others in the market to generate huge returns, explains experienced hedge fund managers from the top hedge fund companies in Park City. Choosing either a short or long position means you’re betting on the prices of stocks. Going short involves planning to sell the stock because of the expectation that its value would decrease while going long involves investing in a stock believing that its value would increase.
Event-Driven Hedge Funds
With this type of hedge fund, you’re basically attempting to make money from particular events that could impact the entire stock market. For example, if a security’s price is expected to increase after a major natural disaster, you might want to purchase that and sell it later on. This strategy could likewise be used in the event of economic turmoil or political instability that usually leads to buyouts and mergers.
Market Neutral Hedge Funds
This is essentially a kind of long-short fund, with the main difference being that the main aim of managers of market neutral funds is to safeguard the investors’ portfolio from the general market’s rising and falling prices. For example, you might put money on an equal amount of stocks in both short and long positions or take the necessary steps to keep your level of risk as low as possible.
It’s imperative to note that the typical strategy for choosing investments isn’t the same in regard to investing in hedge funds. The main reason for this is that it’s common for past return rates to be reviewed to guide investment decisions. With hedge funds, however, data about past return rates aren’t usually available due to such funds’ short life.
With these in mind, you need to decide on a hedge fund based on the manager’s reputation and track record, investment philosophy, as well as the fund’s risk controls. Discuss your options with an experienced hedge fund manager to learn more about your options.