Guide to Hedge Funds

Hedge funds are so-called because of the idea that money managers can hedge their bets to ensure they make a profit whatever the state of the market. These managers are usually former traders or fund managers who have decided to go it alone.

A hedge fund is considered an alternative investment because it is high risk, but like other high risk investments, high returns are possible. Most hedge funds follow a particular investment strategy. The most popular strategies are:

Short selling

Short sellers borrow assets they think overvalued and sell them. Once the price has fallen, they buy the instrument at a lower price and deliver it to the lender.

Global Macro

Instead of focusing on movements in particular stocks, global macro funds focus on worldwide trends.

Event-driven

The hedge fund manager uses this strategy to profit from bankruptcies, mergers and acquisitions, or other one-off events.

As an investor in a hedge fund you can lessen the risk by putting your money into ‘funds of hedge funds’. These invest money across several different hedge funds, thus spreading the risk.

Like any other risky investment, it is wise to apply the rule of only investing money you can afford to lose.