The Role of Hedge Funds & Hedge Fund-Like Mutual Funds in a Portfolio

Using a hedge fund to boost your portfolio.

The initial design of the hedge fund provided a hedging or insurance for the investment portfolio. Now hedge funds offer aggressively managed portfolios with fewer limitations on the investment choices with the goal of generating high returns, according to Investopedia.

Function

Typically, mutual funds can only invest a small portion of the portfolio in option contracts and this portion can only hedge the portfolio as opposed to speculation. Hedge funds can have more leeway to aggressively take advantage of market anomalies.

Features

Hedge funds have nearly unlimited investment choices. The manager can invest long or short in stocks, buy on margin, buy put or call options, purchase derivative investments and dabble in the currency market, to name a few.

Benefits

A savvy investor can use hedge fund-type investments to leverage over-bought or over-sold situations in the market.

Warning

While hedge funds can provide a superior gain, these investment can also experience sizable losses as well.

Considerations

While hedge fund type investments can enhance most any type of portfolio, investors still should consider the advantage of proper asset allocation techniques.

References

• Investopedia: Hedge Fund