Hedge Funds
What are hedge funds?
The original purpose of hedge funds was to diversify investment portfolios, control risk, and provide steady returns over time. While the types of investors in hedge funds have changed throughout time—from private people to pension funds, colleges, and foundations—their fundamental objectives have stayed the same. While some funds may use methods that are "hedged" in the classic sense to mitigate or decrease risk, others may not hedge exposures or apply hedging techniques, making the name "hedge fund" rather misleading. Hedge funds can invest in a wide range of items, such as derivatives, foreign exchange, and publicly listed stocks, according to a straightforward definition. Highly publicised accounts of both disastrous and enormously successful hedge funds might obscure the potential volatility of a particular hedge fund approach.
Hedge funds may concentrate their investments, use leverage, or engage in other strategies that may offer the possibility of higher returns but may also increase volatility or risk; Most hedge funds are not widely accessible to the general public directly, and they are extremely diverse in structure. The regulation of hedge funds varies greatly from country to country, with the United States being one of few important exceptions.Hedge funds focus on carefully chosen assets and security pools that are poised for rewards.
Hedge fund types
Among the many different types of hedge funds the following are the most common ones that we Kaelven as an organization come across on a regular basis.
Global macro hedge funds are actively managed investment vehicles that aim to make money from significant market fluctuations brought on by political or economic events. A worldwide or country-specific equity hedge fund may invest in profitable stocks while protecting itself against equity market declines by selling short overpriced equities or stock indexes. By utilising price or spread inefficiencies, a relative value hedge fund looks to profit from brief variations in the prices of comparable assets. An activist hedge fund invests in firms with the intention of increasing the stock price by demanding that expenses be reduced, assets be reorganised, or the board of directors be replaced.
Benefits of Investing in Hedge Funds
Hedge funds have changed over time from being an investment vehicle for affluent people to a tool used by institutional investors like state and corporate pensions, university endowments, and non-profit foundations to help manage investment risk, diversify portfolios, and generate steady returns over time.
Risk management - In part, the creation of hedge funds was done to assist investors in controlling their risk. Their balanced, or market-neutral, approach to investing enables them to invest in a variety of instruments across both long and short time horizons in an effort to maximise returns. Due to their ability to foresee and mitigate unnecessary risk for their investment partners, hedge funds are positioned as agile participants in the market. Hedge funds have autonomous, specialised teams that they dedicate only to risk management, and they are continuing to amplify these efforts. Compared to other financial standards, hedge funds offer stronger protection for investors against market volatility and downturns.
Portfolio diversification - In order to generate steady returns and satisfy financial responsibilities, investors can no longer rely on straightforward strategies primarily weighted towards fixed income assets. Investors need thorough, nimble, diverse investment portfolios that offer opportunities to maximise return while minimising risk in today's global marketplace. Portfolio diversification adds another layer of risk management by preventing investors from becoming overly concentrated in a particular type of asset.
Transparency - Investors in hedge funds and regulators want disclosures that include important details about the funds handled. Transparency makes it possible for investors to accurately assess their holdings in the fund and for supervisors to keep an eye out for the escalation of hazards.
Periodic review - Independent service providers independently verify that a fund is complying to agreed standards of presentation and performance calculation through periodic reviews of hedge fund filings. This gives fund investors peace of mind that the data they rely on for making decisions is accurate and trustworthy.
How does hedge funds help in making money ?
Through his business, A.W. Jones & Co., Australian entrepreneur Alfred Winslow Jones is accredited with founding the first hedge fund in 1949. He raised $100,000 to create a fund he called the long/short equities model, which sought to use short selling to reduce the risk associated with long-term stock trading. Jones was the first fund manager to integrate short selling, the use of leverage, and a reward structure based on performance in 1952 when he changed his fund into a limited partnership and introduced a 20% incentive fee as compensation for the managing partner. The typical "2 and 20" fee structure used by hedge funds nowadays consists of a 20% performance fee and a 2% management charge. The management fee is determined by the net worth of each investor's shares; as a result, a $1 million investment would result in a $20,000 management fee for that year, which would be used to support the hedge's operations and pay the fund manager. The performance fee typically represents 20% of earnings. A fee of $40,000 is due to the fund if a $1 million investment grows over $1.2 million in a year.
Kaelven’s hedge fund strategies
When it comes to hedge funds, we as Kaelven use strategies on a wide range of investments, including debt and equity securities, commodities, currencies, derivatives, and real estate, to cover a wide range of risk appetites and investment philosophies.
Common hedge fund strategies include equity, fixed-income, and event-driven goals and are categorised based on the manager's preferred method of investing.
In a long/short hedge fund strategy, investors go long and short on two rival companies in the same industry based on their relative valuations. Pairs trading is a variation of this strategy.
A fixed-income hedge fund strategy seeks for capital preservation while providing investors with stable returns with little monthly volatility by holding either long or short positions for fixed-income assets.
A strategy used by event-driven hedge funds capitalises on momentary stock mispricing brought on by corporate events like reorganisations, mergers and acquisitions, bankruptcies, or takeovers.
