Due to the spread of the financial contagion throughout international and domestic arenas, hedge funds have suffered a blow, but are already showing a speedy recovery in stronger economies like the U.S. If we look at the graphical representation of the behaviour of hedge funds since the last 15 years, as drafted by speculators and analysts, there is enormous rise in it, creating its own niche in the investment sector.
Looking at a broader perspective, hedge funds are different from other forms of investments as they are designed in such a way that you can expect to make money without getting perturbed about the usual ups and downs of the financial consortium. Hedge funds comprises of a group of investment instruments regulated by a single facility but spread across different entities for the money to flow on a regular basis.
How does a hedge fund operate?
- Usually investing in hedge funds requires rationalizing techniques. While dealing with hedge funds, investors try out their hands in ‘shorting’ a particular stock. When you short a stock, you borrow it to sell it and when its price decreases further you buy it at a lower price and return it to the owner and the difference in the prices at which the transaction was done earns the investor a profit.
- Hedge funds don’t just operate in equities, but delve into other commodities, like foreign currency, bonds, real estate, insurance, etc.
- The hedge funds are usually managed by a professional you’d hire. These professional are highly paid as they are solely responsible for making money out of these hedge funds by segregating them to the reliable commodities and advising their clients to buy and sell the stocks at the right time by studying the stocks behaviour.
Since the outburst of the financial meltdown, a myth that has spread is if hedge funds have fuelled the financial crisis and if they have a prominent role in its evolution.
The facts recovered say that the hedge funds have no role in the financial meltdown. It is true that the hedge funds are not registered investment authorities, they are operated through de-leveraging of stocks but they cannot be held accountable for the credit crisis.
Investing in hedge funds
Hedge funds are usually maintained by people who can invest around £500,000 and also pay the hedge fund managers to maintain their portfolio.
The risk quotient in hedge funds depends on how well versed your manager is in dealing with the different funds consolidated under one roof. Your manager should know when to buy stocks of a particular commodity and when to sell it.
Regulation of hedge funds
As the various funds dealt within the hedge funds group may be spread across different economies, there are legal and tax implications it may be subjected to. The financial services authority (FSA) operating within UK regulates the hedge funds spread within UK against any market manipulation by drafting policies.