Alternative Investments & Hedge Funds
Hedge funds are a type of investment vehicle for the wealthy and they provide qualified investors with a way to branch out away from regular forms of investment. Instead of only buying stocks and bonds, hedge funds look for ways to provide returns independent of these markets for their investors.
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Hedge Fund Regulation
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Hedge funds have the freedom to invest in practically any investment they want because of the lack of regulation they enjoy, while other investment funds like mutual funds and exchange-traded funds are regulated by the Securities and Exchange Commission. This means that the hedge fund does not have to abide by the rules of the SEC. It can use large amounts of leverage and use other tactics that are not available for mutual funds.
Market-Neutral Funds
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Some hedge funds use a market-neutral investment strategy. With this type of strategy, the fund manager creates a portfolio of long and short positions on stock. This means that regardless of whether the stock market moves up or down, the fund should not lose much money. In some cases, the hedge fund uses leverage with this strategy to amplify the returns for investors in the fund. To make this strategy work, a large amount of analysis must take place when picking the stocks.
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Commodities
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Some hedge funds get into commodities as a way to provide an alternative investment to their investors. These hedge funds may actually buy the commodities themselves or they may buy futures contracts on the commodities. By purchasing commodities, the hedge fund can achieve returns even when the other financial markets in the world are declining in value. Commodities tend to hold their value even when economies are down and other investments do not perform as well.
Fund of Funds
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Some hedge funds use a strategy known as a fund of funds arrangement. With a fund of funds arrangement, the hedge fund invests in other funds instead of a specific asset like a stock, bond or commodity. The hedge fund then owns shares of other hedge funds or mutual funds. By doing this, the hedge fund can create an extremely diversified portfolio for the investors in the fund. Not only is the hedge fund diversified, but each share that it buys is diversified.
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