Your 101 guide to Hedge Funds

If you are looking to increase the total return borne by your portfolio, making hedge funds a part of your investment strategy is a pretty good idea. To know more about these amazing return-generating financial structures, read on –

An introduction to hedge funds

Hedge funds are private funds that use complex investment strategies to mitigate risk and exponentially increase the ROI (Return On Investment).

They are generally run by highly-skilled and experienced managers who have an extraordinary track record in the field of investment. Hedge funds make use of investment strategies and trading methods that are usually not available to traditional investment funds, such as mutual funds. They even have a freer hand in their methods of investment and can use a wider range of financial instruments for the same.

Derivatives are investment risk management tools and they derive their value from the underlying asset. For example, take the scenario of a teacher and a student. The value inculcated in the student is directly dependent on the maximum potential value of the teacher. The more efficient a teacher is, the more knowledgeable their student will be. Similarly, hedge funds use these derivatives to hedge their positions, mitigate risks or cite a view on the future direction of the trend of a particular investment like stocks, bonds, and other such financial instruments. These additional supportive tools are only available to hedge funds and not to traditional funds.

Like the two sides of a coin, if the profit is multiplied with the help of these derivatives, so is the loss in the case of a wrong investment call.

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