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Hedge Fund Volatility Myth

Many investors believe that hedge funds experience a high level of volatility. However, this is not the case. This commonly held misconception is based on the assumption that hedge funds apply global macro strategies. The volatility misunderstanding also stems from the belief that most hedge funds widely use leverage while placing directional bets on:

  • Stocks
  • Bonds
  • Currencies
  • Gold

However, a very small percentage of the hedge funds do in reality apply global macro strategies. The remaining part (approximately 95%) incorporate derivatives for the purpose of leveraging. Some of them even avoid using derivatives and leverage.

Hedge funds are famous for their protection against down markets. Additionally, hedge funds are characterized by their flexibility in applying different investment tools, such as short selling, leverage, derivatives and etc., which cannot be used when investing in mutual funds.

The hedge fund industry has managed to attract some of the most experienced Wall Street professionals thanks to its remuneration structure. The latter is base on the performance of the hedge fund under the management of the particular manager, who also holds shares of the fund. 

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