Hedge funds have always been seen a great way to invest into especially for all those who can afford extra costs. These funds have been originally initiated in 1949 as a way to reflect those types of investment strategies that had nothing to do with the traditional ones.
Alfred Winslow Jones is the person who has pioneered these strategies selling short stocks while further investing in long stocks. Mutual funds are similar to hedge funds only that the latter ones have fewer regulations requiring as well a larger investment. But let’s go deeper into the topic explaining how these funds work.
Investing in hedge funds will always come as a higher risk type of investment with techniques including the one known as ‘leverage’. This means borrowed money that can be traded additionally to the already exiting capital. When these funds need to be used in investment there is the need of an incentive fee which comes as part of the client’s profits. This works in opposition to the assets’ fixed percentage and in return this fee gains more money for the investor.
Although it is not a rule, the ones who own hedge funds are the same with the investors because outside people do not own the required amount for investing in these funds. By the mid 2004, 42 companies have been recorded to share hedge funds in a total amount of $1.1 trillion.
The following techniques are the most commonly used in investing with hedge funds:
* One technique is to start investing in a company before this one faces a major merger. In case one owner has the knowledge of such a merger they can immediately buy large amounts of share. Pretty soon after the merger occurs the shares go up consistently. It is considered however a high risk investment because it might happen for the merger not to occur.
* Another technique is known as selling short. This involves investing in securities that are undervalued, trading forex contracts and commodity. It will result in benefits emerging from the separation between the highest purchase price and current market price in situations such as mergers are.
These funds are considered beneficial due to their security level that is ensured by the privacy of the trading and investing. At present, hedge funds are not registered with SEC and are not made known to other companies and government. More than these, hedge funds have their ‘headquarters’ in places that present less regulations, such as the Virgin Islands, Cayman Islands, etc. There is however a drawback in that hedge funds security looks suspicious to outsiders appearing to them as investments run as secretive.
Due to the fact that hedge funds are very risky seen from the perspective of investors, they always come in huge ROI. This is why they are not for everyone, especially for those individuals who ae not ready to invest large amounts of money when such risk is involved.