What is a Hedge Fund
Hedge Fund represents a collective form of investing similar to classical mutual funds that most people have experience with. Besides the mentioned trait the hedge funds significantly differ from mutual funds. The main differences stem from possibilities they have at disposal, no connection to benchmarks, fees and personal property engagement of the managers.
One of the greatest advantages that hedge funds offer is the great set of investment possibilities. While mutual funds have to subordinate their investment strategies to their pre-determined statutes, hedge funds have no such limits. Their portfolio may consist of any financial instrument of the financial market (stocks, bonds, money market securities, commodities, currencies, derivatives etc.) at any time which enables them to promptly react to the changes. Furthermore the hedge funds may use short selling or various option strategies by which they can achieve positive returns for their members even when the market declines. This provides the investor with better protection than in case of mutual funds which can buy and sell securities only. They can also realize more investment strategies than individual investors thanks to large volumes of managed finances.
Next advantage of hedge funds against the mutual funds is that they are not bound to any benchmarks (e.g. stock market index). While mutual fund managers have to care about not diverging from the benchmark (by which they in fact copy its composition), the hedge fund manager can pursue the long-term goals and doesn`t have to change the portfolio due to irrelevant market changes. Moreover the market is often place of irrational behavior and its following is not a proper way.
Low fees are another significant advantage of hedge funds since in the majority of mutual funds the net returns are greatly consumed by the fees. Investing via hedge funds thus becomes cheaper and overcoming average returns of mutual funds more simple.
Personal property engagement of hedge fund managers is a very important aspect as well. While most of the mutual fund managers manage somebody else`s finances, members of the hedge fund add their property to the manager`s who handles them together and the same way. Responsible behavior of the manager is thus absolute platitude.