A hedge fund does varieties of things than merely buying and selling securities. It takes both long and short positions, use arbitrage , buys and sells undervalued securities , trades options or bonds . And invest in almost any opportunity in any market where it foresees impressive gains at reduced risk.
In other words this funds pool investors money and invest the money to make positive return.
Further, most hedge funds aim at reduce volatility and risk, while offering high returns under different market conditions.
However, strategies of hedge funds may differ offering different combination of volatility , risk and return.
For example, some funds may hedge only against the equity market downturns. On other hand, a global hedge fund may invest in shares , bonds, options, and foreign currencies.
Note that global funds are not very common. Only about 5% of hedge funds are global funds.
Benefits of Hedge funds
Positive returns
Many hedge funds strategies have the ability to generate positive returns in both rising and falling equity and bond markets.
Risk reduction:
Inclusion of hedge funds in a balanced portfolio reduces overall portfolio risk and volatility and increase returns.
Wide choices:
Huge variety of hedge funds investment styles-many uncorrelated with each other-provides investors with a wide choice of hedge fund strategies to meet their investment objectives.
High return:
Academic research proves that hedge funds have higher return and lower overall risk than traditional investment funds.
Ideal Investments:
Hedge funds provide an ideal long-term investment solution , eliminating the need to correctly time entry and exit from markets.
Better diversification:
Adding hedge funds to an investment portfolio provide diversification not otherwise available in traditional investing.
