ChatterBank0 min ago
hedge funds
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what are hedge funds please?
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A simplistic answer:
As unit trusts, investment funds and such like invest in shares in the expectation (and hope!) that the shares will go up and so gain in value, hedge funds invest in financial 'shares' in such a way that the fund profits if the shares go down.
It's 'hedge' in the sense of protection, eg 'a hedge against inflation' because the technique is often used to protect investment gains you already have or to offset investment risks.
I'm sure you'll get more detailed answer later!
Hedge funds do 'hedge' risk. But the major difference between a hedge fund and a traditional investment fund is that the traditional fund tends to be 'long' only, i.e. it invests for future capital gains and dividend income.
A hedge fund is not so limited. It can go 'short' - i.e. bet a share price will go down - or use derivatives (futures/options/CFDs/etc) as well as go 'long'. It can also invest in commodities - be they gold or coal or pork bellies. In going short, they sell shares they do not own at say �1.00 each in anticipation of the price going down to say 50pence each, when they will then buy the shares they need to give to the purchaser and thus make a gross gain of 50pence per share.
Hedge funds also make money out of arbitrage - spotting differentials in one or more markets where they can buy and/or sell and take advantage of the differences. They can also do this via foreign currrency exchange - say a share is priced in GB� and US$, if the difference in the two markets is great enough to cover exhange and trading costs then there is money to be made.
Another way they operate is to buy shares in anticipation of events - for example, the current mining boom leads to a shortage of drills or tyres so they buy shares in compaines that provide these in anticipation of a price hike.
There are other ways they work too - but one glaring difference between hedge funds and traditional funds is the performance related pay the managers get - say 20% of any gain compared to the more normal 1-3% charged by traditional fund managers.
Hope this helps.
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