Hedge funds are nothing but managed portfolios that rely on superior investment techniques. They are aggressively maintained to generate high rewards. From many points of view, they work just like mutual funds, only they are directed to wealthy people. The similarity is in the pooling and managing, while flexibility makes the difference.
Hedging is basically a strategy. It implies reducing risks, but only to maximize the return. The industry has seriously evolved over the past years. There are literally dozens of strategies out there. Surprisingly enough, they carry more risks than the actual market, only because they are based on speculations. Therefore, they go against the market.
From a structural point of view, hedge and mutual funds are similar. You can invest in options, bonds, equities and plenty of securities. You can also get the polled investment run by a manager. This is it. When it comes to the actual strategies, they are way more complex. The can get more profitable, but they can also lead to losses.
Advantages of hedge funds over other opportunities:
The benefits of hedge funds might go in a few different directions. Apart from the high earnings, it is worth considering the flexibility as well. You have the opportunity to trade more securities in different markets at the same time. This way, you reduce risks, bit you also maximize the return on investment. This level of flexibility contributes to your innovation as well. Traders are free, so they inevitably think about new strategies all the time. Thinking that you can outperform the market? Go for it.
Other than that, hedge funds increase shareholder value as well. The simple ownership of specific companies inevitably demands further improvements. Unlocking the shareholder value may force managers to improve operations, work on the structure, cut expenses, eliminate compensations or perhaps encourage an acquisition.
Types of hedge funds:
Many hedge funds are futuristic organizations with well built strategies. The hedge fund universe is exquisite and leaves room for multiple interpretations. Generally, funds can be classified as fixed income or equity focused. The classification can go further though, as there are more subcategories out there. They usually depend on the strategies for investment.
Hedge funds can be short or long. These positions are influenced by the market, yet all investors try to outperform it. On the other hand, you may also opt for market-neutral funds. In this case, managers try to act against the market evolution. Do not overlook event-driven funds either. Any kind of event can become a profitable opportunity. It makes no difference if it is a merger, an acquisition or even a natural disaster. Finally, macro funds cover the market as a whole.
Not sure what might work for you? Obviously, what works for some people is less likely to work for you too. Hedge funds represent an individualist industry. Everyone works for themselves only. This is a one-on-one game where you need to go against the market. It sounds challenging, but this is how big players make money.