In the case of the sky where we see thousands of stars but only one moon, similarly in the case of financial markets where there are so many complex situations as well as tools to take advantage of financial markets; a hedge fund is like a moon of the financial market. A hedge fund in simple words is a type of alternative investment vehicle that pools money from high-net-worth individuals as well as institutions. These funds employ a range of investment strategies and use tools such as leverage, derivatives, short selling, and active portfolio management to generate returns. Given below are some of the important features of hedge fund-
Hedge Fund Features
Unconventional Investment Strategy
The first and foremost feature of a hedge fund is that they are hedge fund is that it is an unconventional investment strategy in the sense that, unlike traditional investment options like stocks, bonds, and mutual funds, real estate where returns are risk are clearly defined in the case of hedge fund risk, as well as returns, are not defined.
High Capital Requirement
Another important feature of the hedge fund is that hedge fund is meant for high net-worth individuals who can invest millions of dollars and that is the reason why a majority of hedge fund have high minimum investment requirements which leads to them being out of reach of the majority of small investors. Hence unlike the stock market where one can buy stock with small capital one needs to have huge capital in order to invest in a hedge fund.
Derivatives and Leverage
Derivatives and leverage which are two of the most hated words in the case of financial markets are the two potent tools as far as hedge fund is concerned because hedge fund makes use of derivatives, short selling as well as leverage in order to amplify the returns for the investors as well as a hedge the investors against the market risk. In simple words, if you are one of those individuals who cannot see the stock price going down 5 percent then you should completely avoid hedge funds as hedge fund deals in derivatives that go up and down 5 percent in seconds.
High Fees and Charges
High fees and charges are other important characteristics of a hedge fund because a hedge fund is actively managed with managers actively taking decisions and working around the clock in order to ensure that investors do not lose on any opportunity as and when they arise. In simple words, if you are worried about your mutual fund charging you annual and maintenance fees then you should look at the fees and charges of a hedge fund maybe then you will feel better about your mutual fund’s fees and charges.
Limited Liquidity
A hedge fund is typically less liquid than other types of investments because there are not many hedge funds available in the market besides investors willing to invest in a hedge fund are also less due to high capital requirements as well as the underlying risk involved in investing in a hedge fund. Hence one cannot liquidate his or her hedge fund holding overnight which is the case with other forms of investments like mutual funds, stocks, bonds, and so on.
Bad Reputation
Since hedge funds use short selling as well as other hedging strategies to reduce risk and generate returns in declining markets hedge funds are always the bad guys in the eyes of regulators like central banks, stock exchanges, government, business news channels, and the public whenever there is panic or widespread selling in financial markets.
As one can see from the above that hedge fund has many unique characteristics which sets it apart from other financial instruments and that is the reason why any individual thinking of investing in a hedge fund should carefully read the above features and then only should take any decision regarding his or her investment in the hedge fund.