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Hedge Funds 101

Hedge funds have gained high popularity among investors thanks to the many benefits they offer. They incorporate different financial tools for the purposes of:

  • Minimizing risk
  • Increasing returns
  • Decrease in the dependence on equity and bond markets

Hedge funds are characterized by their high flexibility in using such strategies as:

  • Short selling
  • Leverage
  • Derivatives (e.g. calls, puts, options) and etc.

Hedge funds are not the same regarding the investment returns they generate for their investors. Additionally, they experience different levels of both risk and volatility. Some hedge funds are used as a protection against falling markets. Additionally, a number of hedge funds succeed in delivering to their investors non-market related returns. They are also focused on the preservation of capital, overlooking the importance of returns magnitude.

The management of hedge funds is done by experienced managers that possess a high degree of discipline. They tend to specialize in a particular field and trade only within it. The hedge fund industry has managed to attract some of the best professionals thanks to its remuneration structure that is based on the performance of the fund, not on the value of the capital under management as is the case with mutual funds.

The hedge fund industry has attracted many pension funds, endowments, private banks, insurance companies and etc. by its many advantages. They typically select them for the purpose of minimizing the volatility of their portfolios as well as for increasing the generated returns.

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