Hedge Fund Strategies

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A hedge fund is an investment fund that pools capital from accredited investors or institutional investors as well as invests in a variety of assets, oft alongside complex portfolio-structure as well as hazard-direction techniques. Hedge funds are mostly distinct from common funds, as their use of leverage and other speculative investment techniques oftentimes results inward greater take a chance as well as higher returns.

The term "hedge fund" originated from the London stockbroking and investment banking community in the belatedly 1950s together with early 1960s. At that time, the London stock marketplace was undergoing a catamenia of nifty turmoil, equally a issue of which stockbrokers were looking for ways to protect the value of their clients' portfolios from the effects of stock marketplace volatility. One solution that was devised was the creation of specialised investment vehicles, which were designed to hedge, or protect, the value of a portfolio from stock marketplace volatility. These investment vehicles became known as "hedge funds".

Hedge funds are typically structured as individual partnerships, in which the fund managers deed equally the full general partners and the investors (accredited investors or institutional investors) act as the express partners. This structure allows the fund managers to have a not bad deal of flexibility inward damage of how they deal the fund'sec assets together with invest the upper-case letter that has been raised.

The vast majority of hedge funds employ a multifariousness of investment strategies, amongst the near mutual being long/curt equity, global macro, issue-driven, and relative value. Long/curt equity hedge funds are the largest category of hedge fund, with close to $ii trillion in assets under direction (AUM) equally of June 2013. Global macro hedge funds are the second largest category, amongst approximately $one.4 trillion inwards AUM. Event-driven in addition to relative value hedge funds are smaller, with close to $600 billion together with $400 billion inwards AUM, respectively.

The role of leverage is 1 of the most distinguishing features of hedge funds. Leverage tin can live defined equally the role of borrowed upper-case letter to increment the potential return of an investment. Hedge funds typically purpose leverage to magnify the returns that they generate from their investment strategies. For case, a hedge fund that has $100 one thousand thousand inwards assets in addition to borrows $50 1000000 to invest inward a long/short equity strategy would take $150 1000000 in total assets invested inward the strategy. If the strategy generates a render of x%, the fund would accept a render of xv% (x% return on $100 one thousand thousand + 5% return on $fifty one thousand thousand).

The purpose of leverage can too increment the hazard of loss for a hedge fund. If the long/brusque equity strategy that the fund is invested in generates a return of -ten%, the fund would accept a render of -5% (-x% render on $100 1000000 + 0% return on $50 meg). In this scenario, the purpose of leverage has magnified the loss that the fund has incurred.

Hedge funds are typically subject field to a variety of regulatory requirements, depending on their jurisdiction of operation. In the US, hedge funds are subject to the same regulations equally other investment companies, such equally the Investment Company Act of 1940 together with the Investment Advisers Act of 1940. In the United Kingdom of Great Britain and Northern Ireland, hedge funds are field of study to the Financial Services in addition to Markets Act 2000. In other jurisdictions, such every bit the Cayman Islands, hedge funds are field of study to lighter rule.

The global hedge fund manufacture has grown significantly in recent years, alongside the full AUM of hedge funds increasing from $1 trillion in 2000 to $three trillion inward 2007. The increase of the manufacture has been driven by a issue of factors, including the increasing institutionalization of hedge fund investing, the increasing role of hedge funds by high-cyberspace-worth individuals, together with the increasing popularity of hedge funds every bit a tool for managing risk.