Hedge Funds Yesterday, Today And Tomorrow

By Author: Fabiola Groshan
Total Articles: 2678
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Hedge funds are often given a stigma from the media, because they are considered risky, dangerous or only suitable for the very wealthy. Perhaps this was true when the very first hedge funds came out, much like when mutual funds appeared on the market, as they were labeled in a very similar way, but it's certainly not today. The mutual fund story basically provided accessibility to what was once only a “Rich Man's game”, before the 1930s- stocks and bonds, where one needed substantial amounts of money to create a portfolio of stocks. Once mutual funds came along, they provided a facility to collectively pool assets from many, in order to seek out diversification opportunities amongst a pool of stocks, further facilitating multiple ownership with lower minimums.

A mutual fund must usually follow a mandate which restricts too much movement into any one area or single investment. Richard Cayne Meyer International explains that if, for example, a fund manager has knowledge of the markets dropping the very next day, he or she is limited to moving only maybe 5% of the entire fund into cash and is forced to watch the other ...
... invested element drop in value. If however, he sees an opportunity where a single company will double in value due to some excellent growth opportunities, he may only invest 5% into that stock. In addition to this aspect, Richard Cayne Meyer Asset Management Ltd draws the attention to the fact that mutual funds generally have disclosure requirements that largely prevent them from using short selling, leverage, concentrated investments and derivatives. This of course plays two roles in mutual funds, it limits profit marking potential, but it also limits the risk involved in case the fund manager is wrong.

Richard Cayne of Meyer International also points out the advantages of a hedge funds, in terms of flexibility, as such an investment has much more flexibility due to the possibility of taking short positions, use financial derivatives such as futures, warrants and options contracts. A hedge fund therefore has more opportunity to make money and to lose money in any market conditions. There are many different types of hedge funds these days, from very low risk, all the way up to a roll of the dice. On some of the low risk hedge funds the manager is under a strict mandate, making sure the fund should be properly hedged, meaning reducing the risk of loss caused by price fluctuation, by purchasing or selling equal quantities of the same or very similar commodities in different markets, while the more aggressive ones allow the fund manager to bet a very large proportion of the fund on any one stock, commodity, bond or currency trade. Richard Cayne Meyer Asset Management Ltd points out that it is these very high risk funds that the media alerts us to and the ones making and loosing 50% overnight are certainly not for the weak at heart. The ones which most people would like to see have consistent positive months with a minimal number of negative months and there are many out there achieving figures averaging close to 1% per month, with the worst performing months being down only 0.2%. As long as this occurs only 30% of the time over one year, that fund would yield 11.2%.

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